AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 33-80784
FILE NO. 811-8484
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. ____
POST-EFFECTIVE AMENDMENT NO. 7 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT CO PANY ACT OF 1940 [X]
AMENDMENT NO. 10 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------------
MENTOR INSTITUTIONAL TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 1357
RICHMOND, VIRGINIA 23286
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (804) 782-3647
----------------------
PAUL F. COSTELLO
PRESIDENT
MENTOR INSTITUTIONAL TRUST
901 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO
TIMOTHY W. DIGGINS, ESQ.
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MA 02110
----------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX)
[ ] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (B)
<PAGE>
[X] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(1)
[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES PURSUANT TO
RULE 24F-2. A RULE 24F-2 NOTICE FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
FOR EACH OF THE PORTFOLIOS OF THE TRUST (OTHER THAN THE SNAP FUND) HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 1995. A
RULE 24F-2 NOTICE FOR THE SNAP FUND FOR ITS FISCAL YEAR ENDED JUNE 30, 1996
WILL BE FILED WITHIN THE APPLICABLE TIME PERIOD SPECIFIED IN THE RULE.
-2-
<PAGE>
MENTOR INSTITUTIONAL TRUST
CROSS REFERENCE SHEET
(as required by Rule 404(c))
Part A:
Mentor Perpetual International Portfolio -- Class A and Class B shares
N-1A Item No.
Location
1. Cover Page..........................Cover Page
2. Synopsis............................Cover Page; Expense summary
3. Condensed Financial Information.....Expense summary
4. General Description of Registrant...Cover Page; Investment objective
and policies; Mentor Institutional
Trust; Investment practices and
risks
5. Management of the Fund..............Investment objectives and policies;
Investment practices and risks;
Management of the Portfolio;
Mentor Institutional Trust; How the
Portfolio values its shares; Other
services; Custodian and transfer
and dividend agent; Performance
information
5A. Management's Discussion
of Fund Performance...............Not Applicable
6. Capital Stock and Other
Securities........................Management of the Portfolio;
Mentor Institutional Trust; How to
buy shares; Distribution Plan (Class
B shares); How to sell shares; How
to exchange shares; Other services;
How distributions are made; tax
information; Performance
information
-3-
<PAGE>
7. Purchase of Securities Being
Offered...........................Management of the Portfolio; How
to buy shares
8. Redemption or Repurchase............How to buy shares; How to sell
shares
9. Pending Legal Proceedings...........Not Applicable
Mentor Perpetual International Portfolio -- Class D shares
N-1A Item No.
Location
1. Cover Page..........................Cover Page
2. Synopsis............................Cover Page; Expense summary
3. Condensed Financial Information.....Expense summary
4. General Description of Registrant...Cover Page; Investment objective
and policies; Other investment
practices and risks; Mentor
Institutional Trust
5. Management of the Fund..............Investment objectives and policies;
Other investment practices and
risks; Management of the Portfolio;
How the Portfolio values its shares;
Mentor Institutional Trust;
Custodian and transfer and
dividend agent; Performance
information
5A. Management's Discussion
of Fund Performance...............Not Applicable
6. Capital Stock and Other
Securities........................Management of the Portfolio;
Mentor Institutional Trust; How
the Portfolio values its shares; How
-4-
<PAGE>
to buy shares; How to sell shares;
How distributions are made; Taxes;
Mentor Institutional Trust;
Performance information
7. Purchase of Securities Being
Offered...........................Management of the Portfolio; How
to buy shares
8. Redemption or Repurchase............How to buy shares; How to sell
shares
9. Pending Legal Proceedings...........Not Applicable
Mentor Perpetual International Portfolio -- Class E shares
N-1A Item No.
Location
1. Cover Page..........................Cover Page
2. Synopsis............................Cover Page; Expense summary
3. Condensed Financial Information.....Expense summary
4. General Description of Registrant...Cover Page; Investment objective
and policies; Other investment
practices and risks; Mentor
Institutional Trust
5. Management of the Fund..............Investment objectives and policies;
Other investment practices and
risks; Management of the Portfolio;
How the Portfolio values its shares;
Mentor Institutional Trust;
Custodian and transfer and
dividend agent; Performance
information
5A. Management's Discussion
of Fund Performance...............Not Applicable
6. Capital Stock and Other
-5-
<PAGE>
Securities........................Management of the Portfolio;
Mentor Institutional Trust; How
the Portfolio values its shares; How
to buy shares; How to sell shares;
How distributions are made; Taxes;
Mentor Institutional Trust;
Performance information
7. Purchase of Securities Being
Offered...........................Management of the Portfolio; How
to buy shares
8. Redemption or Repurchase............How to buy shares; How to sell
shares
9. Pending Legal Proceedings...........Not Applicable
Part B - Mentor Perpetual International Portfolio
N-1A Item No. Location
10. Cover Page........................Cover Page
11. Table of Contents.................Cover Page
12. General Information and History...General
13. Investment Objectives and
Policies........................Investment Restrictions; Certain
Investment Techniques
14. Management of the Fund............Management of the Trust;
Investment Advisory and Other
Services; The Distributor
15. Control Persons and Principal
Holders of Securities...........Principal Holders of Securities
16. Investment Advisory and Other
Services........................Investment Advisory and Other
Services; Management of the Trust;
Independent Accountants; Experts;
Custodian
17. Brokerage Allocation..............Brokerage
-6-
<PAGE>
18. Capital Stock and Other
Securities......................Determination of Net Asset Value;
Tax Status; The Distributor;
Shareholder Liability
19. Purchase, Redemption and Pricing
of Securities Being Offered.....Brokerage; Determination of Net
Asset Value; The Distributor
20. Tax Status........................Investment Restrictions; Tax Status
21. Underwriters......................The Distributor
22. Calculations of Performance Data..Performance Information
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
The (i) Cross Reference Sheet in respect of Part A for Mentor Institutional
Trust and its Cash Management Portfolio, Fixed-Income Portfolio, Limited
Duration Portfolio, and SNAP Fund and (ii) the prospectus of Mentor
Institutional Trust and each of the above-named portfolios, as amended, which
are contained in Amendment No. 5 to the Registrant's Registration Statement on
Form N-1A (File No. 80784) filed on March 11, 1996, are incorporated herein by
reference.
-7-
<PAGE>
PROSPECTUS August __, 1996
CLASS A AND B SHARES
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO seeks long-term capital
appreciation by investing in a diversified portfolio of equity securities of
issuers outside the United States. Mentor Perpetual Advisors, L.L.C. is the
Portfolio's investment adviser. CLASS A SHARES and CLASS B SHARES of the
Portfolio are being offered by this Prospectus. The Portfolio may use leverage -
that is, it may borrow money to purchase additional portfolio securities, which
involves special risks.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. INVESTORS CAN FIND MORE DETAILED
INFORMATION IN THE AUGUST ___, 1996 STATEMENT OF ADDITIONAL INFORMATION, AS
AMENDED FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT, CALL MENTOR
DISTRIBUTORS, INC. AT 1-800-869-6042. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23286-0109.
-------------------------
MENTOR DISTRIBUTORS, INC.
DISTRIBUTOR
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-8-
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in
the Portfolio. The following table summarizes an investor's maximum transaction
costs from investing in Class A and Class B shares of the Portfolio and expenses
the Portfolio expects to incur in its first fiscal year with respect to its
Class A and Class B shares. The Examples show the cumulative expenses
attributable to a hypothetical $1,000 investment in the Class A and Class B
shares of the Portfolio over specified periods.
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) (1) 5.75% None
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None2 4.0% in the first year,
(as a percentage of the lower of the original declining to 1.0% in the
purchase price or redemption proceeds) (3) fifth year, and eliminated
thereafter (4)
Redemption Fees None None
Exchange Fee None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets) CLASS A CLASS B
Management Fees 1.00% 1.00%
12b-1 Fees 0.00% 0.75%
Shareholder Service Fee 0.25% 0.25%
Other Expenses* 0.20% 0.20%
---- ----
Total Portfolio Operating Expenses* 1.45% 2.20%
</TABLE>
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation. In the absence of this expense limitation, other expenses
are expected to be 0.45% for Class A and Class B shares and Total Portfolio
Operating Expenses are expected to be 1.70% for Class A shares and 2.45% for
Class B shares.
(1) Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
(2) A contingent deferred sales charge ("CDCS") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $_______ that are redeemed within one year of purchase.
(3) The amount redeemed is computed as the lesser of the current net asset value
of the shares redeemed, and the original purchase price of the shares. See "How
to Buy Shares - Class B Shares."
(4) A CDSC of 1.00% is assessed on Class B shares that are purchased pursuant to
certain asset-allocation plans and that are not otherwise subject to a CDSC as
shown in the table, if those shares are redeemed within one year of purchase.
-9-
<PAGE>
EXAMPLES
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
CLASS A CLASS B
1 year $71 $62
3 years $101 $99
An investment of $1,000 in the Portfolio would incur the following
expenses assuming 5% annual return and no redemption:
CLASS A CLASS B
1 year $71 $22
3 years $101 $69
This information is provided to help investors understand the
expenses of investing in the Portfolio and an investor's share of the estimated
operating expenses for the Portfolio. The Examples should not be considered a
representation of future performance; actual expenses may be more or less than
those shown.
INVESTMENT OBJECTIVE AND POLICIES
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO'S INVESTMENT OBJECTIVE IS
LONG-TERM CAPITAL APPRECIATION. The Portfolio is designed for investors who
believe that investment in a diversified portfolio of securities of issuers
located outside the U.S. offers the potential for long-term capital
appreciation.
The Portfolio invests in a diversified portfolio of securities of
issuers located outside the United States. The Portfolio's investments will
normally include common stocks, preferred stocks, securities convertible into
common stocks or preferred stocks, and warrants to purchase common stocks or
preferred stocks. The Portfolio may also invest to a lesser extent in debt
securities and other types of investments if Mentor Perpetual believes they
would help achieve the Portfolio's objective. The Portfolio may hold a portion
of its assets in cash or money market instruments.
The Portfolio will not limit its investments to any particular type
of company. The Portfolio may invest in companies, large or small, whose
earnings are believed to be in a relatively strong growth trend, or in companies
in which significant further growth is not anticipated but whose market value
per share is thought to be undervalued.
It is likely that, at times, a substantial portion of the
Portfolio's assets will be invested in securities of issuers in emerging
markets, including under-developed and developing nations. Investment in
emerging markets are subject to the same risks applicable to foreign investments
generally, although those risks may be increased due to conditions in such
markets. For example, the securities markets and legal systems in emerging
markets may only be in a developmental stage and may provide few, or none, of
the advantages or protections of markets or legal systems available in more
developed countries. Although many of the securities in which the Portfolio may
invest are traded on securities exchanges, they may trade in limited volume, and
the exchanges may not provide all of the conveniences or protections provided by
securities exchanges in more developed markets. The Portfolio may also invest a
substantial portion of its assets in securities traded in the over-the-counter
markets
-10-
<PAGE>
and not on any exchange, which may affect the liquidity of the investment and
expose the Portfolio to the credit risk of its counterparties in trading those
investments. See "Other investment practices -- Foreign securities."
Fixed-income securities in which the Portfolio may invest will be of
investment grade. A security will be deemed to be of "investment grade" if, at
the time of investment by the Portfolio, the security is rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard & Poor's, or at a comparable
rating by another nationally recognized rating organization. Securities rated
Baa or BBB lack outstanding investment characteristics and have speculative
characteristics and are subject to greater credit and market risks than
higher-rated securities. The Portfolio will not be required to dispose of a
security held by it if the security's rating falls below investment grade,
although Mentor Perpetual will consider whether continued investment in the
security is consistent with the Portfolio's investment objectives. See the
Statement of Additional Information for descriptions of securities ratings
assigned by Moody's and Standard & Poor's.
Mentor Perpetual may under unusual circumstances implement temporary
"defensive" strategies in order to reduce fluctuations in the value of the
Portfolio's assets. At those times, the Portfolio may invest any portion of its
assets in cash or cash equivalents, money market instruments, or other
short-term, high-quality investments Mentor Perpetual considers consistent with
such defensive strategies.
OTHER INVESTMENT PRACTICES AND RISKS
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of these practices and certain risks they may involve.
INVESTMENTS IN SMALLER COMPANIES. The Fund may invest a substantial
portion of its assets in securities issued by small companies. Such companies
may offer greater opportunities for capital appreciation than larger companies,
but investments in such companies may involve certain special risks. Such
companies may have limited product lines, markets, or financial resources and
may be dependent on a limited management group. While the markets in securities
of such companies have grown rapidly in recent years, such securities may trade
less frequently and in smaller volume than more widely held securities. The
values of these securities may fluctuate more sharply than those of other
securities, and the Portfolio may experience some difficulty in establishing or
closing out positions in these securities at prevailing market prices. There may
be less publicly- available information about the issuers of these securities or
less market interest in such securities than in the case of larger companies,
and it may take a longer period of time for the prices of such securities to
reflect the full value of their issuers' underlying earnings potential or
assets.
Some securities of smaller issuers may be restricted as to resale or
may otherwise be highly illiquid. The ability of the Portfolio to dispose of
such securities may be greatly limited, and the Portfolio may have to continue
to hold such securities during periods when Mentor Perpetual would otherwise
have sold the security. It is possible that Mentor Perpetual or its affiliates
or clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or at
more favorable prices, than the Portfolio.
FOREIGN SECURITIES. Investments in foreign securities entail certain
risks. The Portfolio may invest in securities principally traded in foreign
markets. Since foreign securities are normally denominated and traded in foreign
currencies, the values of the Portfolio's assets may be affected favorably or
unfavorably by currency exchange rates and exchange control regulations. There
may be less information publicly available about a foreign company than about a
U.S. company, and foreign companies are not generally subject to accounting,
auditing, and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign companies are less liquid and
at times more volatile than securities of comparable U.S. companies. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment or delivery of
-11-
<PAGE>
securities or in the recovery of the Portfolio's assets held abroad) and
expenses not present in the settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. In the case of securities issued by
a foreign governmental entity, the issuer may in certain circumstances be unable
or unwilling to meet its obligations on the securities in accordance with their
terms, and the Portfolio may have limited recourse available to it in the event
of default. The laws of some foreign countries may limit the Portfolio's ability
to invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities. The Portfolio may buy or
sell foreign currencies and options and futures contracts on foreign currencies
for hedging purposes in connection with its foreign investments.
BORROWING AND LEVERAGE. The Portfolio may borrow money to invest in
additional portfolio securities. This practice, known as "leverage", increases
the Portfolio's market exposure and its risk. When the Portfolio has borrowed
money for leverage and its investments increase or decrease in value, the
Portfolio's net asset value will normally increase or decrease more than if it
had not borrowed money. The interest the Portfolio must pay on borrowed money
will reduce the amount of any potential gains or increase any losses. The extent
to which the Portfolio will borrow money, and the amount it may borrow, depend
on market conditions and interest rates. Successful use of leverage depends on
Mentor Perpetual's ability to predict market movements correctly.
OPTIONS AND FUTURES. The Portfolio may buy and sell call and put
options to hedge against changes in net asset value or to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return.
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage
costs and may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
Index futures and options. The Portfolio may buy and sell index
futures contracts ("index futures") and options on index futures and on indices
for hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index futures"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of the
index between the time when the Portfolio enters into and terminates an index
futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return.
Risks related to options and futures strategies. Options and futures
transactions involve costs and may result in losses. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities held by the Portfolio that are the subject of a
hedge. The successful use by the Portfolio of the strategies
-12-
<PAGE>
described above further depends on the ability of Mentor Perpetual to forecast
market movements correctly. Other risks arise from the Portfolio's potential
inability to close out futures or options positions. Although the Portfolio will
enter into options or futures transactions only if Mentor Perpetual believes
that a liquid secondary market exists for such options or futures contract,
there can be no assurance that the Portfolio will be able to effect closing
transactions at any particular time or at an acceptable price. Certain
provisions of the Internal Revenue Code may limit the Portfolio's ability to
engage in options and futures transactions.
The Portfolio generally expects that its options transactions will
be conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets . The Portfolio's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of Mentor Perpetual, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or
sell futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding options
on futures contracts would exceed 5% of the Portfolio's assets. (For options
that are "in-the-money" at the time of purchase, the amount by which the option
is "in-the-money" is excluded from this calculation.)
REPURCHASE AGREEMENTS AND SECURITIES LOANS. The Portfolio may enter
into repurchase agreements and securities loans. Under a repurchase agreement,
the Portfolio purchases a debt instrument for a relatively short period (usually
not more than one week), which the seller agrees to repurchase at a fixed time
and price, representing the Portfolio's cost plus interest. Under a securities
loan, the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party should become involved in bankruptcy or
insolvency proceedings, it is possible that the Portfolio may be treated as an
unsecured creditor and be required to return the underlying collateral to the
other party's estate.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's annual portfolio turnover
rate is expected to be less than 200% for the current fiscal year.
As a matter of policy, the Trustees will not materially change the
Portfolio's investment objective without shareholder approval. (Any such change
could, of course, result in a change in the nature of the securities in which
the Portfolio may invest and the risks involved in an investment in the
Portfolio.)
-13-
<PAGE>
MANAGEMENT OF THE PORTFOLIO
The Trustees of Mentor Institutional Trust (the "Trust") are
responsible for generally overseeing the conduct of the Trust's business. MENTOR
PERPETUAL ADVISORS, L.L.C. ("Mentor Perpetual"), located at 901 East Byrd
Street, Richmond, Virginia 23219, acts as investment adviser to the Portfolio
pursuant to a Management Contract between the Trust and Mentor Perpetual. MENTOR
INVESTMENT GROUP, INC. ("Mentor") serves as administrator to the Portfolio.
Mentor Perpetual is an investment advisory firm owned equally by Perpetual plc
and Mentor. The Perpetual organization currently serves as investment adviser
for assets of more than $6 billion. Its clients include 28 unit investment
trusts and other public investment pools for over 150 clients, including private
individuals, charities, pension plans, and life assurance companies. Mentor
Perpetual currently serves as investment adviser to the Mentor Perpetual Global
Portfolio, an open-end mutual fund which is a series of The Mentor Funds.
Investment decisions for the Portfolio are made by a team of investment
professionals at Mentor Perpetual. Mentor is a wholly owned subsidiary of Wheat
First Butcher Singer, Inc. ("Wheat First Butcher Singer"). Wheat First Butcher
Singer, through other subsidiaries, also engages in securities brokerage,
investment banking, and related businesses.
Mentor Perpetual makes investment decisions for the Portfolio and
places the purchase and sale orders for the Portfolio's portfolio transactions.
In selecting broker-dealers, Mentor Perpetual may consider research and
brokerage services furnished to it and its affiliates. Subject to seeking the
best overall terms available, Mentor Perpetual may consider sales of shares of
the Portfolio (and, if permitted by law, of other funds in the Mentor family) as
a factor in the selection of broker-dealers to execute portfolio transactions
for the Portfolio. Mentor Perpetual may at times cause the Portfolio to pay
commissions to broker-dealers affiliated with Mentor Perpetual.
HOW THE PORTFOLIO VALUES ITS SHARES
The Portfolio calculates the net asset value of a share of each
class by dividing the total value of its assets, less liabilities, by the number
of its shares outstanding. Shares are valued as of the close of regular trading
on the New York Stock Exchange each day the Exchange is open. Portfolio
securities for which market quotations are readily available are stated at
market value. Short-term investments that will mature in 60 days or less are
stated at amortized cost, which has been determined to approximate the fair
market value of such investments. All other securities and assets are valued at
their fair values. The net asset value for Class A shares will generally differ
from that of Class B shares due to the variance in daily net income realized by
and dividends paid on each class of shares, and any differences in the expenses
of the different classes.
Securities quoted in foreign currencies are translated into U.S.
dollars at the current exchange rates or at such other rates as the Trustees may
determine in computing net asset value. As a result, fluctuations in the values
of such currencies in relation to the U.S. dollar will affect the net asset
value of Portfolio shares even though there has not been any change in the
values of such securities as quoted in such foreign currencies.
SALES ARRANGEMENTS
This Prospectus offers investors two classes of shares which bear
sales charges in different forms and amounts and which bear different levels of
expenses:
Class A shares. An investor who purchases Class A shares pays a
sales charge at the time of purchase. As a result, Class A shares are not
subject to any charges when they are redeemed, except that sales at net asset
value in excess of $1 million are subject to a contingent deferred sales charge
(a "CDSC"). Certain purchases of Class A shares qualify for reduced sales
charges. Class A shares currently bear no 12b-1 fees. See "How to Buy Shares ---
Class A shares.)
-14-
<PAGE>
Class B shares. Class B shares are sold without an initial sales
charge, but are subject to a CDSC of up to 4% if redeemed within five or six
years, depending on the Portfolio. Class B shares also bear 12b-1 fees. Class B
shares provide an investor the benefit of putting all of the investor's money to
work from the time the investment is made, but will have a higher expense ratio
and pay lower dividends than Class A shares due to the 12b-1 fees. See "How to
Buy Shares --- Class B shares."
Which arrangement is for you? The decision as to which class of
shares provides a suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. For more information about these sales arrangements, consult
your investment dealer or Mentor Distributors. Sales personnel may receive
different compensation depending on which class of shares they sell. Shares may
only be exchanged for shares of the same class of certain other Portfolios and
for shares of Cash Resource U.S. Government Money Market Fund. See "How to
Exchange Shares."
HOW TO BUY SHARES
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little as $100. Investments under
IRAs and investments under qualified retirement plans are subject to a minimum
initial investment of $250. The minimum initial investment may be waived for
current and retired Trustees, and current and retired employees of the Trust or
Mentor Distributors. You can buy Portfolio shares BY COMPLETING THE ENCLOSED NEW
ACCOUNT FORM and sending it to Mentor Distributors along with a check or money
order made payable to Mentor Institutional Trust, THROUGH YOUR FINANCIAL
INSTITUTION, which may be an investment dealer, a bank, or another institution,
or THROUGH AUTOMATIC INVESTING. If you do not have a dealer, Mentor Distributors
can refer you to one.
Automatic investment plan. Once you have made the initial minimum
investment in a Portfolio, you can make regular investments of $50 or more on a
monthly or quarterly basis through automatic deductions from your bank checking
account. Application forms are available from your investment dealer or through
Mentor Distributors.
Shares are sold at a price based on the net asset value of a share
of the relevant class next determined after Mentor Distributors receives your
purchase order. In most cases, in order to receive that day's public offering
price, Mentor Distributors or your investment dealer must receive your order
before the close of regular trading on the New York Stock Exchange. If you buy
shares through your investment dealer, the dealer must ensure that Mentor
Distributors receives your order before the close of regular trading on the New
York Stock Exchange for you to receive that day's public offering price.
CLASS A SHARES. The public offering price of Class A shares is the
net asset value plus a sales charge. The Portfolio receives the net asset value.
The sales charge varies depending on the size of your purchase and is allocated
between your investment dealer and Mentor Distributors. The current sales
charges for the Class A shares of the Portfolio are as follows:
-15-
<PAGE>
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
PUBLIC OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
<S> <C>
Less than $50,000..................... 5.75% 5.82% 5.00%
$50,000 but less than $100,000 4.75% 4.99% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.00%
$250,000 but less than $500,000 3.00% 3.09% 2.50%
$500,000 but less than $1 million 2.00% 2.04% 1.75%
$1 million or more.................... 0% 0% (see below)
- ------------------
</TABLE>
* At the discretion of Mentor Distributors, the entire sales charge may at times
be reallowed to dealers. The Staff of the Securities and Exchange Commission has
indicated that dealers who receive more than 90% of the sales charge may be
considered underwriters.
There is no initial sales charge on purchases of Class A shares of
$ or more. However, a CDSC of 1.00% is imposed on redemptions of
such shares within the first year after purchase, based on the lower of the
shares' cost and current net asset value. (A CDSC is also imposed on any shares
purchased without a sales charge as part of a purchase of shares of $1 million
or more under a purchase accumulation plan. Contact Mentor Distributors for more
information.) Any of the shares which were acquired by reinvestment of
distributions will be redeemed without a CDSC , and amounts representing capital
appreciation will not be subject to a CDSC. In determining whether a CDSC is
payable in respect of the shares redeemed, the Portfolio will first redeem
shares not subject to any charge. Mentor Distributors receives the entire amount
of any CDSC you pay.
You may be eligible to buy Class A shares at reduced sales charges.
Consult your investment dealer or Mentor Distributors for details about Quantity
Discounts and Accumulated Purchases, Letters of Intent, the Reinvestment
Privilege, Concurrent Purchases, and the Automatic Investment Plan. Descriptions
are also included in the New Account Form and in the Statement of Additional
Information. Shares may be sold at net asset value to certain categories of
investors, including to shareholders of other mutual funds who invest in the
Trust in response to certain promotional activities, and the CDSC may be waived
under certain circumstances. See "How to Buy Shares --- General" below.
Mentor Distributors, the investment advisers, or certain
sub-advisers, or affiliates thereof, at their own expense and out of their own
assets, may also provide other compensation to dealers in connection with sales
of the Portfolios. Such compensation may also include, but is not limited to,
financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising or
sales campaigns, or other dealer- sponsored special events. In some instances,
this compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell significant amounts of shares.
Dealers may not use sales of the Trust's shares to qualify for this compensation
to the extent such may be prohibited by the laws of any state or any
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. Certain dealers may not sell all classes of shares.
CLASS B SHARES. Class B shares are sold without initial sales charge,
although a CDSC will be imposed if you redeem shares within five years of
purchase. The following types of shares may be redeemed without charge: (i)
shares acquired by reinvestment of distributions and (ii) shares otherwise
exempt from the CDSC, as described in "How to Buy Shares --- General" below. For
other shares, the amount of the charge is determined as a percentage of the
lesser of the current market value or the cost of the shares being redeemed. The
amount of the CDSC will depend on the number of years since you invested in the
shares being redeemed and the dollar amount being redeemed, according to the
following table:
-16-
<PAGE>
YEARS SINCE PURCHASE PAYMENT MADE CDSC
--------------------------------- -----------
1 4.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6+ None
No CDSC is imposed upon the redemption of Class B shares purchased
pursuant to certain asset-allocation plans and that are not otherwise subject to
the CDSC shown above. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. In determining whether a CDSC is payable in
respect of the shares redeemed, the Portfolio will first redeem the shares held
longest (together with any shares received upon reinvestment of distributions
with respect to those shares). Consult Mentor Distributors for more information.
Any of the shares being redeemed which were acquired by reinvestment
of distributions will be redeemed without a CDSC, and amounts representing
capital appreciation will not be subject to a CDSC. In determining whether a
CDSC is payable in respect of the shares redeemed, the Portfolio will first
redeem shares not subject to any charge. For this purpose, the amount of any
increase in a share's value above its initial purchase price is exempt from the
CDSC. Thus, when a share that has appreciated in value is redeemed during the
five-year period, a CDSC is assessed only on its initial purchase price. For
information on how sales charges are calculated if you exchange your shares, see
"How to Exchange Shares."
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 of those shares (including shares purchased through reinvestment
of distributions on those 100 shares) at this time, your CDSC will be calculated
as follows:
o Proceeds of 50 shares redeemed at $12 per share $600
o Minus proceeds of 10 shares not subject to a CDSC
because they were acquired through dividend reinvestment
(10 x $12) -120
o Minus appreciation on remaining shares, also not subject
to CDSC (40 x $2) - 80
o Amount subject to a CDSC $400
Mentor Distributors receives the entire amount of any CDSC you pay. Consult
Mentor Distributors for more information.
GENERAL
Mentor Distributors, Inc. ("Mentor Distributors"), 901 East Byrd
Street, Richmond, Virginia 23219, serves as distributor of the Portfolio's
shares. Mentor Distributors is not obligated to sell any specific amount of
shares of the Portfolio.
A Portfolio may sell its Class A shares without a sales charge and
may waive the CDSC on shares redeemed by the Trust's current and retired
Trustees (and their families), current and retired employees (and their
families) of Mentor Distributors, Mentor Perpetual, and each of their
affiliates, registered representatives and
-17-
<PAGE>
other employees (and their families) of broker-dealers having sales agreements
with Mentor Distributors, employees (and their families) of financial
institutions having sales agreements with Mentor Distributors (or otherwise
having an arrangement with a broker-dealer or financial institution with respect
to sales of Portfolio shares), financial institution trust departments investing
an aggregate of $1 million or more in one or more funds in the Mentor family,
clients of certain administrators of tax-qualified plans, employer-sponsored
retirement plans, tax-qualified plans when proceeds from repayments of loans to
participants are invested (or reinvested) in funds in the Mentor family, shares
redeemed under a Portfolio's Systematic Withdrawal Plan (limited to 10% of a
shareholder's account in any calendar year), and "wrap accounts" for the benefit
of clients of financial planners adhering to certain standards established by
Mentor Distributors. The Portfolio may sell shares without a sales charge or a
CDSC in connection with the acquisition by the Portfolio of assets of an
investment company or personal holding company. In addition, the CDSC may be
waived in the case of (i) redemptions of shares held at the time a shareholder
dies or becomes disabled, including the shares of a shareholder who owns the
shares with his or her spouse as joint tenants with right of survivorship,
provided that the redemption is requested within one year of the death or
initial determination of disability; (ii) redemptions in connection with the
following retirement plan distributions: (a) lump-sum or other distributions
from a qualified retirement plan following retirement; (b) distributions from an
IRA, Keogh Plan, or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code following attainment of age 59 1/2; and (c) a tax-free return on an
excess contribution to an IRA; (iii) redemptions by pension or profit sharing
plans sponsored by Mentor Investment Group, Inc. or an affiliate; and (iv)
redemptions by pension or profit sharing plans of which Mentor Investment Group,
Inc. or any affiliate serves as a plan fiduciary. In addition, certain
retirement plans with over 200 employees may purchase Class A shares at net
asset value without a sales charge. The Portfolio may sell its Class A shares
without a sales charge to shareholders of the mutual funds who invest in The
Mentor Funds in response to certain promotional activities (in which case a CDSC
of 1% may apply for a period of years after the purchase). Contact Mentor
Distributors.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in, shares
of the Portfolio at net asset value.
If you are considering redeeming or exchanging shares of the
Portfolio or transferring shares to another person shortly after purchase, you
should pay for those shares with a certified check to avoid any delay in
redemption, exchange, or transfer. Otherwise the Portfolio may delay payment
until the purchase price of those shares has been collected or, if you redeem by
telephone, until 15 calendar days after the purchase date.
To eliminate the need for safekeeping, the Trust will not issue
certificates for your shares unless you request them.
Because of the relatively high cost of maintaining accounts, the
Portfolio reserves the right to redeem, upon not less than 60 days' notice, any
Portfolio account below $500 as a result of redemptions. A shareholder may,
however, avoid such a redemption by the Portfolio by increasing his investment
in shares of the Portfolio to a value of $500 or more during such 60-day period.
In all cases Mentor Perpetual or Mentor Distributors reserves the
right to reject any particular investment.
Reinvestment Privilege. If you redeem Class A or B shares of the
Portfolio, you have a one-time right, within 60 days, to reinvest the redemption
proceeds plus the amount of CDSC you paid, if any, at the next-determined net
asset value. Front-end sales charges will not apply to such reinvestment. Mentor
Distributors must be notified in writing by you or by your financial institution
of the reinvestment for you to recover the CDSC, or to eliminate the front-end
sales charge. If you redeem shares in the Portfolio, there may be tax
consequences.
-18-
<PAGE>
DISTRIBUTION PLAN (CLASS B SHARES)
Mentor Distributors, Inc., having its principal offices at 901 East
Byrd Street, Richmond, Virginia 23219, is the principal distributor for the
Portfolio's shares.
The Portfolio has adopted a Distribution Plan under Rule 12b-1 with
respect to its Class B shares (the "Plan") providing for payments by the
Portfolio to Mentor Distributors from the assets attributable to the Portfolio's
Class B shares at the annual rate set out under "Summary of Portfolio Expenses -
Annual Portfolio Operating Expenses" above. The Trustees may reduce the amount
of payments or suspend the Plan for such periods as they may determine. Mentor
Distributors also receives the proceeds of any CDSC imposed on redemptions of
shares.
Payments under the Plan are intended to compensate Mentor
Distributors for services provided and expenses incurred by it as principal
underwriter of the Portfolio's Class B shares. Mentor Distributors may select
financial institutions (such as a broker/dealer or bank) to provide sales
support services as agents for their clients or customers who beneficially own
Class B shares of the Portfolio. Financial institutions will receive fees from
Mentor Distributors based upon Class B shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by Mentor Distributors. Mentor
Distributors may suspend or modify such payments to dealers. Such payments are
also subject to the continuation of the Plan, the terms of any agreements
between dealers and Mentor Distributors, and any applicable limits imposed by
the National Association of Securities Dealers, Inc.
HOW TO SELL SHARES
You can sell your shares in the Portfolio to the Portfolio any day
the New York Stock Exchange is open, either directly to the Portfolio or through
your investment dealer. The Portfolio will only redeem shares for which it has
received payment.
Selling shares directly to the Portfolio. Send a signed letter of
instruction or stock power form, along with any certificates that represent
shares you want to sell, to Mentor Institutional Trust, c/o Boston Financial
Data Services, Inc. ("BFDS"), 2 Heritage Drive, North Quincy, Massachusetts
02171. The price you will receive is the net asset value next calculated after
your request is received in proper form less any applicable CDSC. In order to
receive that day's net asset value, your request must be received before the
close of regular trading on the New York Stock Exchange. If you sell shares
having a net asset value of $50,000 or more or if you want your redemption
proceeds payable to you at a different address or to someone else, the
signatures of registered owners or their legal representatives must be
guaranteed by a bank, broker-dealer, or certain other financial institutions.
See the Statement of Additional Information for more information about where to
obtain a signature guarantee. Stock power forms are available from your
investment dealer, Mentor Distributors, and many commercial banks. Mentor
Distributors usually requires additional documentation for the sale of shares by
a corporation, partnership, agent, or fiduciary, or surviving joint owner.
Contact Mentor Distributors for details.
Selling shares by telephone. You may use Mentor Distributors'
Telephone Redemption Privilege to redeem shares from your account unless you
have notified Mentor Distributors of an address change within the preceding 15
days. Unless an investor indicates otherwise of the New Account Form, Mentor
Distributors will be authorized to act upon redemption and transfer instructions
received by telephone from a shareholder, or any person claiming to act as his
or her representative, who can provide Mentor Distributors with his or her
account registration and address as it appears on Mentor Distributors' records.
Mentor Distributors will employ these and other reasonable procedures to confirm
that instructions communicated by telephone are genuine; if it fails to employ
reasonable procedures, Mentor Distributors may be liable for any losses due to
unauthorized or fraudulent instructions. For more information, consult Mentor
Distributors. During periods of unusual market changes and
-19-
<PAGE>
shareholder activity, you may experience delays in contacting Mentor
Distributors by telephone in which case you may wish to submit a written
redemption request, as described above, or contact your investment dealer, as
described below. The Telephone Redemption Privilege may be modified or
terminated without notice.
Selling shares through your investment dealer. Your dealer must
receive your request before the close of regular trading on the New York Stock
Exchange to receive that day's net asset value. Your dealer will be responsible
for furnishing all necessary documentation to Mentor Distributors, and may
charge you for its services.
Systematic Withdrawal Program. You may redeem Class A or B shares of
the Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program are
not subject to a CDSC, but the aggregate withdrawals of Class B shares in any
year are limited to 10% of the value of the account at the time of enrollment.
Contact Mentor Distributors for more information.
General. The Portfolio generally sends you payment for your shares
the business day after your request is received. Under unusual circumstances,
the Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part by securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in
the Portfolio worth at least $1,000 for shares of the same class of any
Portfolio of The Mentor Funds, a series investment company offering shares of
nine portfolios with different investment objectives and policies, at net asset
value beginning 15 days after purchase. You may also exchange shares of the
Portfolio for shares of Cash Resource U.S. Government Money Market Fund (the
"Cash Fund"). If you exchange shares subject to a CDSC, the transaction will not
be subject to a CDSC. However, when you redeem the shares acquired through the
exchange, the redemption may be subject to the CDSC, depending upon when you
originally purchased the shares, using the schedule of the Portfolio from which
your first exchange was effected. For purposes of computing the CDSC, the length
of time you have owned your shares will be measured from the date of original
purchase and will not be affected by any exchange.
To exchange your shares, simply complete an Exchange Authorization
Form and send it to Mentor Institutional Trust, c/o BFDS, 2 Heritage Drive,
North Quincy, Massachusetts 02171. Exchange Authorization Forms are available by
calling or writing Mentor Distributors. For federal income tax purposes, an
exchange is treated as a sale of shares and generally results in a capital gain
or loss. A Telephone Exchange Privilege is currently available. Mentor
Distributors' procedures for telephonic transactions are described above under
"How to Sell Shares." The Telephone Exchange Privilege is not available if you
were issued certificates for shares which remain outstanding. Ask you investment
dealer or Mentor Distributors for a prospectus relating to the Mentor Funds or
the Cash Fund. Shares of certain of the Portfolios may not be available to
residents of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management and
have an adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where Mentor Distributors or the Trustees
believe doing so would be in the best interests of the Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
-20-
<PAGE>
notified of any such action to the extent required by law. Consult Mentor
Distributors before requesting an exchange by calling 1- 800-382-0016. See the
Statement of Additional Information to find out more about the exchange
privilege.
HOW DISTRIBUTIONS ARE MADE
The Portfolio distributes net investment income and any net realized
capital gains at least annually. Distributions from capital gains are made after
applying any available capital loss carryovers. All Portfolio distributions will
be invested in additional Portfolio shares, unless the shareholder instructs the
Portfolio otherwise.
TAXES
The Portfolio intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as
ordinary income, except that any distributions of net capital gain will be taxed
as long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year the Trust will notify
shareholders of the amount and tax status of distributions paid by the Portfolio
for the preceding year. In buying or selling securities for the Portfolio,
Mentor Perpetual will not normally take into account the effect any purchase or
sale of securities will have on the tax positions of the Portfolio's
shareholders.
Shareholders of the Portfolio who are U.S. citizens or residents may
be able to claim a foreign tax credit or deduction on their U.S. income tax
returns with respect to foreign taxes paid by the Portfolio. If, at the end of
the fiscal year of the Portfolio, more than 50% of the Portfolio's total assets
are represented by securities of foreign corporations, the Portfolio intends to
make an election permitted by the Internal Revenue Code to treat any foreign
taxes it paid as paid by its shareholders. In that case, shareholders who are
U.S. citizens, U.S. corporations, and, in some cases, U.S. residents will be
required to include in U.S. taxable income their pro rata share of such taxes,
but may then be entitled to claim a foreign tax credit or deduction (but not
both) for their share of such taxes.
The foregoing is a summary of certain federal income tax consequences
of investing in the Portfolio. Dividends and distributions also may be subject
to state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of the Portfolio, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
-21-
<PAGE>
OTHER SERVICES
Administrative Services. Mentor Investment Group, Inc., located at
901 East Byrd Street, Richmond, Virginia 23210, provides the Portfolio with
certain administrative personnel and services necessary to operate the
Portfolio, such as bookkeeping and accounting services. Mentor provides these
services to the Portfolio at an annual rate of 0.10% of the Portfolio's average
net assets.
Shareholder Servicing Plan. The Trust has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to the Class A and Class B
shares of the Portfolio. Under the Service Plan, financial institutions will
enter into shareholder service agreements with the Trust to provide
administrative support services to their customers who are Portfolio
shareholders. In return for providing these support services, a financial
institution may receive payments at a rate not exceeding 0.25% of the average
daily net assets of the Class A or Class B shares of the Portfolio. These
administrative services may include, but are not limited to, the following
functions: providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer personnel, as necessary
or beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Portfolio; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Portfolio reasonably
requests.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Perpetual and/or Mentor, or affiliates
thereof, for providing administrative support services to holders of Class A or
Class B shares of the Portfolio. These payments will be made directly by Mentor
Perpetual and/or Mentor and will not be made from the assets of the Portfolio.
MENTOR INSTITUTIONAL TRUST
Mentor Institutional Trust is a Massachusetts business trust
organized on February 8, 1994 as IMG Institutional Trust. A copy of the
Agreement and Declaration of Trust, which is governed by Massachusetts law, is
on file with the Secretary of State of The Commonwealth of Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into five
series, one representing the Portfolio, the others representing other Portfolios
with varying investment objectives and policies. The Portfolio's shares are
currently divided into four classes. Only the Portfolio's Class A and Class B
shares are offered by the Prospectus. The Portfolio also offers other classes of
shares with different sales charges and expenses. Because of these different
sales charges and expenses, the investment performance of the classes will vary.
For more information, including your eligibility to purchase any other class of
shares, contact Mentor Distributors.
Each share has one vote, with fractional shares voting
proportionally. Shares of each class will vote together as a single class except
when required by law or determined by the Trustees. Shares of the Portfolio are
freely transferable, are entitled to dividends as declared by the Trustees, and,
if the Portfolio were liquidated, would receive the net assets of the Portfolio.
The Trust may suspend the sale of shares at any time and may refuse any order to
purchase shares. Although the Portfolio and the Trust are not required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees, or to take other actions as provided in the
Agreement and Declaration of Trust.
-22-
<PAGE>
In the interest of economy and convenience, the Portfolio will not
issue certificates for its shares except at the shareholder's request.
CUSTODIAN AND TRANSFER AND DIVIDEND AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and Trust
Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about Class A and Class B shares of the Portfolio. The
Portfolio's "yield" for each class of shares is calculated by dividing the
Portfolio's annualized net investment income per share during a recent 30-day
period by the maximum public offering price per share on the last day of that
period. "Total return" for the one-, five- and ten-year periods (or for the life
of a class, if shorter) through the most recent calendar quarter represents the
actual rate of return on an investment of $1,000 in the Portfolio at the maximum
public offering price (in the case of Class A shares) and reflecting (in the
case of Class B shares) the deduction of any applicable CDSC. Total return may
also be presented for other periods or based on investment at reduced sales
charge levels or at net asset value. Investment performance of different classes
of shares of the Portfolio will differ. Any quotation of investment performance
not reflecting a CDSC would be reduced if such sales charges were reflected.
Quotations of yield and total return for a period when an expense limitation was
in effect will be greater than if the limitation had not been in effect. The
Portfolio's performance may be compared to various indices. See the Statement of
Additional Information. Information may be presented in advertisements about the
Portfolio describing the background and professional experience of the
Portfolio's investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and does
not predict future performance. Investment performance, which will vary, is
based on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objectives and policies. These
factors should be considered when comparing the Portfolio's investment results
to those of other mutual funds and other investment vehicles.
-23-
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
Table of Contents
Expense summary.............................................................3
Investment objective and policies...........................................4
Other investment practices and risks........................................5
Management of the Portfolio.................................................8
How the Portfolio values its shares.........................................8
Sales arrangements..........................................................8
How to buy shares...........................................................9
General....................................................................11
Distribution Plan (Class B Shares).........................................13
How to sell shares.........................................................13
How to exchange shares.....................................................14
How distributions are made.................................................15
Taxes......................................................................15
Other services.............................................................16
Custodian and transfer and dividend agent..................................17
Performance information....................................................17
MENTOR
PERPETUAL
INTERNATIONAL
PORTFOLIO
----------
PROSPECTUS
----------
Mentor Distributors, Inc.
-24-
<PAGE>
PROSPECTUS August , 1996
CLASS D SHARES
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO seeks long-term capital
appreciation by investing in a diversified portfolio of equity securities of
issuers outside the United States. Mentor Perpetual Advisors, L.L.C. is the
Portfolio's investment adviser. CLASS D SHARES of the Portfolio are being
offered by this prospectus principally to institutions and high net-worth
individual investors. The Portfolio may use leverage - that is, it may borrow
money to purchase additional portfolio securities, which involves special risks.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. INVESTORS CAN FIND MORE DETAILED
INFORMATION IN THE AUGUST , 1996 STATEMENT OF ADDITIONAL INFORMATION, AS AMENDED
FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT, CALL MENTOR DISTRIBUTORS,
INC. AT 1-800-869-6042. The Statement has been filed with the Securities and
Exchange Commission and is incorporated into this Prospectus by reference. The
Portfolio's address is P.O. Box 1357, Richmond, Virginia 23286-0109.
-------------------------
MENTOR DISTRIBUTORS, INC.
DISTRIBUTOR
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-25-
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in
the Portfolio. The following table summarizes an investor's maximum transaction
costs from investing in the Portfolio and expenses the Portfolio expects to
incur in its first full fiscal year. The Example shows the cumulative expenses
attributable to a hypothetical $500,000 investment in the Portfolio over
specified periods.
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees 1.00%
12b-1 Fees 0.00%
Other Expenses* 0.10%
----
Total Portfolio Operating Expenses* 1.10%
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation. In the absence of this expense limitation, Other Expenses
are expected to be 0.35% and Total Portfolio Operating Expenses are expected to
be 1.35%.
EXAMPLE
An investment of $500,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
1 year $6,000
3 years $17,500
This information is provided to help investors understand the
expenses of investing in the Portfolio and an investor's share of the estimated
operating expenses of the Portfolio. The Example should not be considered a
representation of future performance; actual expenses may be more or less than
those shown.
-26-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO'S INVESTMENT OBJECTIVE IS
LONG-TERM CAPITAL APPRECIATION. The Portfolio is designed for institutional
investors who believe that investment in a diversified portfolio of securities
of issuers located outside the U.S. offers the potential for long-term capital
appreciation.
The Portfolio invests in a diversified portfolio of securities of
issuers located outside the United States. The Portfolio's investments will
normally include common stocks, preferred stocks, securities convertible into
common stocks or preferred stocks, and warrants to purchase common stocks or
preferred stocks. The Portfolio may also invest to a lesser extent in debt
securities and other types of investments if Mentor Perpetual believes they
would help achieve the Portfolio's objective. The Portfolio may hold a portion
of its assets in cash or money market instruments.
The Portfolio will not limit its investments to any particular type
of company. The Portfolio may invest in companies, large or small, whose
earnings are believed to be in a relatively strong growth trend, or in companies
in which significant further growth is not anticipated but whose market value
per share is thought to be undervalued.
It is likely that, at times, a substantial portion of the
Portfolio's assets will be invested in securities of issuers in emerging
markets, including under-developed and developing nations. Investment in
emerging markets are subject to the same risks applicable to foreign investments
generally, although those risks may be increased due to conditions in such
markets. For example, the securities markets and legal systems in emerging
markets may only be in a developmental stage and may provide few, or none, of
the advantages or protections of markets or legal systems available in more
developed countries. Although many of the securities in which the Portfolio may
invest are traded on securities exchanges, they may trade in limited volume, and
the exchanges may not provide all of the conveniences or protections provided by
securities exchanges in more developed markets. The Portfolio may also invest a
substantial portion of its assets in securities traded in the over-the-counter
markets and not on any exchange, which may affect the liquidity of the
investment and expose the Portfolio to the credit risk of its counterparties in
trading those investments. See "Other investment practices -- Foreign
securities."
Fixed-income securities in which the Portfolio may invest will be of
investment grade. A security will be deemed to be of "investment grade" if, at
the time of investment by the Portfolio, the security is rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard & Poor's, or at a comparable
rating by another nationally recognized rating organization. Securities rated
Baa or BBB lack outstanding investment characteristics and have speculative
characteristics and are subject to greater credit and market risks than
higher-rated securities. The Portfolio will not be required to dispose of a
security held by it if the security's rating falls below investment grade,
although Mentor Perpetual will consider whether continued investment in the
security is consistent with the Portfolio's investment objectives. See the
Statement of Additional Information for descriptions of securities ratings
assigned by Moody's and Standard & Poor's.
Mentor Perpetual may under unusual circumstances implement temporary
"defensive" strategies in order to reduce fluctuations in the value of the
Portfolio's assets. At those times, the Portfolio may invest any portion of its
assets in cash or cash equivalents, money market instruments, or other
short-term, high-quality investments Mentor Perpetual considers consistent with
such defensive strategies.
-27-
<PAGE>
OTHER INVESTMENT PRACTICES AND RISKS
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of these practices and certain risks they may involve.
INVESTMENTS IN SMALLER COMPANIES. The Fund may invest a substantial
portion of its assets in securities issued by small companies. Such companies
may offer greater opportunities for capital appreciation than larger companies,
but investments in such companies may involve certain special risks. Such
companies may have limited product lines, markets, or financial resources and
may be dependent on a limited management group. While the markets in securities
of such companies have grown rapidly in recent years, such securities may trade
less frequently and in smaller volume than more widely held securities. The
values of these securities may fluctuate more sharply than those of other
securities, and the Portfolio may experience some difficulty in establishing or
closing out positions in these securities at prevailing market prices. There may
be less publicly- available information about the issuers of these securities or
less market interest in such securities than in the case of larger companies,
and it may take a longer period of time for the prices of such securities to
reflect the full value of their issuers' underlying earnings potential or
assets.
Some securities of smaller issuers may be restricted as to resale or
may otherwise be highly illiquid. The ability of the Portfolio to dispose of
such securities may be greatly limited, and the Portfolio may have to continue
to hold such securities during periods when Mentor Perpetual would otherwise
have sold the security. It is possible that Mentor Perpetual or its affiliates
or clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or at
more favorable prices, than the Portfolio.
FOREIGN SECURITIES. Investments in foreign securities entail certain
risks. The Portfolio may invest in securities principally traded in foreign
markets. Since foreign securities are normally denominated and traded in foreign
currencies, the values of the Portfolio's assets may be affected favorably or
unfavorably by currency exchange rates and exchange control regulations. There
may be less information publicly available about a foreign company than about a
U.S. company, and foreign companies are not generally subject to accounting,
auditing, and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign companies are less liquid and
at times more volatile than securities of comparable U.S. companies. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment or delivery of securities or in the
recovery of the Portfolio's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. In the case of securities issued by
a foreign governmental entity, the issuer may in certain circumstances be unable
or unwilling to meet its obligations on the securities in accordance with their
terms, and the Portfolio may have limited recourse available to it in the event
of default. The laws of some foreign countries may limit the Portfolio's ability
to invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities. The Portfolio may buy or
sell foreign currencies and options and futures contracts on foreign currencies
for hedging purposes in connection with its foreign investments.
BORROWING AND LEVERAGE. The Portfolio may borrow money to invest in
additional portfolio securities. This practice, known as "leverage", increases
the Portfolio's market exposure and its risk. When the Portfolio has borrowed
money for leverage and its investments increase or decrease in value, the
Portfolio's net asset value will normally increase or decrease more than if it
had not borrowed money. The interest the Portfolio must pay on borrowed money
will reduce the amount of any potential gains or increase any losses. The extent
to which the Portfolio will borrow money, and the amount it may borrow, depend
on market conditions and interest rates. Successful use of leverage depends on
Mentor Perpetual's ability to predict market movements correctly.
OPTIONS AND FUTURES. The Portfolio may buy and sell call and put
options to hedge against changes in net asset value or to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return.
-28-
<PAGE>
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage
costs and may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
Index futures and options. The Portfolio may buy and sell index
futures contracts ("index futures") and options on index futures and on indices
for hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index futures"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of the
index between the time when the Portfolio enters into and terminates an index
futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return.
Risks related to options and futures strategies. Options and futures
transactions involve costs and may result in losses. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities held by the Portfolio that are the subject of a
hedge. The successful use by the Portfolio of the strategies described above
further depends on the ability of Mentor Perpetual to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out futures or options positions. Although the Portfolio will enter into options
or futures transactions only if Mentor Perpetual believes that a liquid
secondary market exists for such options or futures contract, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. Certain provisions of the Internal
Revenue Code may limit the Portfolio's ability to engage in options and futures
transactions.
The Portfolio generally expects that its options transactions will
be conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets . The Portfolio's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of Mentor Perpetual, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or
sell futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding options
on futures contracts would exceed 5% of the Portfolio's assets. (For options
that are "in-the-money" at the time of purchase, the amount by which the option
is "in-the-money" is excluded from this calculation.)
REPURCHASE AGREEMENTS AND SECURITIES LOANS. The Portfolio may enter
into repurchase agreements and securities loans. Under a repurchase agreement,
the Portfolio purchases a debt instrument for a relatively short period (usually
not more than one week), which the seller agrees to repurchase at a fixed time
and price, representing the Portfolio's cost plus interest. Under a securities
loan, the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party
-29-
<PAGE>
should become involved in bankruptcy or insolvency proceedings, it is possible
that the Portfolio may be treated as an unsecured creditor and be required to
return the underlying collateral to the other party's estate.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's annual portfolio turnover
rate is expected to be less than 200% for the current fiscal year.
As a matter of policy, the Trustees will not materially change the
Portfolio's investment objective without shareholder approval. (Any such change
could, of course, result in a change in the nature of the securities in which
the Portfolio may invest and the risks involved in an investment in the
Portfolio.)
MANAGEMENT OF THE PORTFOLIO
The Trustees of the Trust are responsible for generally overseeing
the conduct of the Trust's business. MENTOR PERPETUAL ADVISORS, L.L.C. ("Mentor
Perpetual"), located at 901 East Byrd Street, Richmond, Virginia 23219, acts as
investment adviser to the Portfolio pursuant to a Management Contract between
the Trust and Mentor Perpetual. MENTOR INVESTMENT GROUP, INC. ("Mentor") serves
as administrator to the Portfolio. Mentor does not receive compensation from the
Portfolio for the performance of such services. Mentor Perpetual is an
investment advisory firm owned equally by Perpetual plc and Mentor. The
Perpetual organization currently serves as investment adviser for assets of more
than $6 billion. Its clients include 28 unit investment trusts and other public
investment pools for over 150 clients, including private individuals, charities,
pension plans, and life assurance companies. Mentor Perpetual currently serves
as investment adviser to the Mentor Perpetual Global Portfolio, an open-end
mutual fund which is a series of The Mentor Funds. Investment decisions for the
Portfolio are made by a team of investment professionals at Mentor Perpetual.
Mentor is a wholly owned subsidiary of Wheat First Butcher Singer, Inc. ("Wheat
First Butcher Singer"). Wheat First Butcher Singer, through other subsidiaries,
also engages in securities brokerage, investment banking, and related
businesses.
Mentor Perpetual makes investment decisions for the Portfolio and
places the purchase and sale orders for the Portfolio's portfolio transactions.
In selecting broker-dealers, Mentor Perpetual may consider research and
brokerage services furnished to it and its affiliates. Subject to seeking the
best overall terms available, Mentor Perpetual may consider sales of shares of
the Portfolio (and, if permitted by law, of other funds in the Mentor family) as
a factor in the selection of broker-dealers to execute portfolio transactions
for the Portfolio. Mentor Perpetual may at times cause the Portfolio to pay
commissions to broker-dealers affiliated with Mentor Perpetual.
HOW THE PORTFOLIO VALUES ITS SHARES
The Portfolio calculates the net asset value of its shares by
dividing the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on the
New York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which has been determined to approximate the fair market value
of such investments. All other securities and assets are valued at their fair
values.
-30-
<PAGE>
Securities quoted in foreign currencies are translated into U.S.
dollars at the current exchange rates or at such other rates as the Trustees may
determine in computing net asset value. As a result, fluctuations in the values
of such currencies in relation to the U.S. dollar will affect the net asset
value of Portfolio shares even though there has not been any change in the
values of such securities as quoted in such foreign currencies.
HOW TO BUY SHARES
You can buy Portfolio shares BY COMPLETING THE ENCLOSED NEW ACCOUNT
FORM and sending it to Mentor Distributors along with a check or money order
made payable to Mentor Institutional Trust. Mentor Distributors, Inc. ("Mentor
Distributors"), 901 East Byrd Street, Richmond, Virginia 23219, serves as
distributor of the Portfolio's shares. Mentor Distributors is not obligated to
sell any specific amount of shares of the Portfolio.
Investors will be required to make minimum initial investments of
$500,000 in Class D shares of the Portfolio and minimum subsequent investments
of $25,000. Investments made through advisory accounts maintained with
investment advisers registered under the Investment Advisers Act of 1940
(including "wrap" accounts) are not subject to these minimum investment
requirements. The minimum initial investment may be waived for current and
retired Trustees, and current and retired employees of the Trust or Mentor
Distributors. The Portfolio reserves the right at any time to change the initial
and subsequent investment minimums required of investors.
Shares are sold at a price based on the net asset value of a share
of the relevant class next determined after Mentor Distributors receives your
purchase order. In most cases, in order to receive that day's public offering
price, Mentor Distributors must receive your order before the close of regular
trading on the New York Stock Exchange.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to Mentor Perpetual, or (iii) a combination of
such securities and cash. Purchase of shares of the Portfolio in exchange for
securities is subject in each case to the determination by Mentor Perpetual that
the securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by Mentor Perpetual in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the
Portfolio's next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in the market
price of accepted securities at the time of valuation become the property of the
Portfolio and must be delivered to the Portfolio upon receipt by the investor
from the issuer. A gain or loss for federal income tax purposes would be
realized upon the exchange by an investor that is subject to federal income
taxation, depending upon the investor's basis in the securities tendered. A
shareholder who wishes to purchase shares by exchanging securities should obtain
instructions by calling Mentor Distributors at 1-800-869-6042.
Mentor Distributors, Mentor Perpetual, or affiliates thereof, at
their own expense and out of their own assets, may provide compensation to
dealers in connection with sales of shares of the Portfolio. Such compensation
may include, but is not limited to, financial assistance to dealers in
connection with conferences, sales, or training programs for their employees,
seminars for the public, advertising or sales campaigns, or other
dealer-sponsored special events. In some instances, this compensation may be
made available only to certain dealers whose representatives have sold or are
expected to sell significant amounts of shares. Dealers may not use sales of
Portfolio shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc.
In all cases Mentor Perpetual or Mentor Distributors reserves the
right to reject any particular investment.
-31-
<PAGE>
HOW TO SELL SHARES
You can sell your shares in the Portfolio to the Portfolio any day
the New York Stock Exchange is open directly to the Portfolio. The Portfolio
will only redeem shares for which it has received payment.
Send a signed letter of instruction or stock power form, along with
any certificates that represent shares you want to sell, to the Portfolio c/o:
Mentor Institutional Trust, P.O. Box 1357, Richmond, Virginia 23286-0109.
Redemptions will be effected at the net asset value per share of the Portfolio
next determined after the receipt by the Portfolio of redemption instructions in
"good order" as described below. Shares may be redeemed by submitting a written
request for redemption to Mentor Distributors, or to the Portfolio The price you
will receive is the net asset value next calculated after your request is
received in proper form. In order to receive that day's net asset value, your
request must be received before the close of regular trading on the New York
Stock Exchange.
General. The Portfolio generally sends you payment for your shares
the business day after your request is received. Under unusual circumstances,
the Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption by making payment
in whole or in part by securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
A redemption request will be considered to have been made in "good
order" if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to
be redeemed, and identifies the shareholder's Portfolio
account number;
(2) the request is signed by each registered owner exactly as
the shares are registered; and
(3) if the shares to be redeemed were issued in certificate
form, the certificates are endorsed for transfer (or are
accompanied by an endorsed stock power) and accompany the
redemption request.
If you sell shares having a net asset value of $50,000 or more or if you
want your redemption proceeds payable to you at a different address or to
someone else, the signatures of registered owners or their legal representatives
must be guaranteed by a bank, broker-dealer, or certain other financial
institutions. See the Statement of Additional Information for more information
about where to obtain a signature guarantee. Stock power forms are available
from Mentor Distributors and many commercial banks. Mentor Distributors usually
requires additional documentation for the sale of shares by a corporation,
partnership, agent, or fiduciary, or surviving joint owner. Contact Mentor
Distributors for details.
-32-
<PAGE>
If you are considering redeeming or exchanging shares of the Portfolio or
transferring shares to another person shortly after purchase, you should pay for
those shares with a certified check to avoid any delay in redemption, exchange,
or transfer. Otherwise the Portfolio may delay payment until the purchase price
of those shares has been collected or, if you redeem by telephone, until 15
calendar days after the purchase date.
To eliminate the need for safekeeping, the Portfolio will not issue
certificates for your shares unless you request them.
Mentor Distributors may facilitate any redemption request. There is no extra
charge for this service.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in the
Portfolio worth at least $1,000 for Class D shares of certain other Portfolios
comprising the Trust at their respective net asset values beginning 15 days
after purchase. You may also exchange shares of the Portfolio for shares of Cash
Resource U.S. Government Money Market Fund (the "Cash Fund"). To exchange your
shares, simply complete an Exchange Authorization Form and send it to Mentor
Institutional Trust, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171. Exchange Authorization Forms are available by
calling or writing Mentor Distributors. For federal income tax purposes, an
exchange is treated as a sale of shares and generally results in a capital gain
or loss. Ask Mentor Distributors for a prospectus relating to the Cash Fund.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where Mentor Distributors or the Trustees
believe doing so would be in the best interests of the Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. Consult Mentor
Distributors at 1-800-382-0016 before requesting an exchange. See the Statement
of Additional Information to find out more about the exchange privilege.
HOW DISTRIBUTIONS ARE MADE
The Portfolio distributes net investment income and any net realized capital
gains at least annually. Distributions from capital gains are made after
applying any available capital loss carryovers. All Portfolio distributions will
be invested in additional Portfolio shares, unless the shareholder instructs the
Portfolio otherwise.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
The following is intended principally for shareholders subject to federal
income taxation:
All Portfolio distributions will be taxable to shareholders as ordinary
income, except that any distributions of net capital gain will be taxed as
long-term capital gain, regardless of how long a shareholder has held the shares
(although the loss on a sale of shares held for six months or less will be
treated as long-term capital loss to the
-33-
<PAGE>
extent of any capital gain distribution received with respect to those shares).
Distributions will be taxable as described above whether received in cash or in
shares through the reinvestment of distributions. Early in each year the Trust
will notify shareholders of the amount and tax status of distributions paid by
the Portfolio for the preceding year. In buying or selling securities for the
Portfolio, Mentor Perpetual will not normally take into account the effect any
purchase or sale of securities will have on the tax positions of the Portfolio's
shareholders.
Shareholders of the Portfolio who are U.S. citizens or residents may be able
to claim a foreign tax credit or deduction on their U.S. income tax returns with
respect to foreign taxes paid by the Portfolio. If, at the end of the fiscal
year of the Portfolio, more than 50% of the Portfolio's total assets are
represented by securities of foreign corporations, the Portfolio intends to make
an election permitted by the Internal Revenue Code to treat any foreign taxes it
paid as paid by its shareholders. In that case, shareholders who are U.S.
citizens, U.S. corporations, and, in some cases, U.S. residents will be required
to include in U.S. taxable income their pro rata share of such taxes, but may
then be entitled to claim a foreign tax credit or deduction (but not both) for
their share of such taxes.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends and distributions also may be subject to
state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of the Portfolio, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
MENTOR INSTITUTIONAL TRUST
Mentor Institutional Trust is a Massachusetts business trust organized on
February 8, 1994 as IMG Institutional Trust. A copy of the Agreement and
Declaration of Trust, which is governed by Massachusetts law, is on file with
the Secretary of State of The Commonwealth of Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into five
series, one representing the Portfolio, the others representing other Portfolios
with varying investment objectives and policies. The Portfolio's shares are
currently divided into four classes. Only the Portfolio's Class D shares are
offered by the Prospectus. The Portfolio also offers other classes of shares
with different sales charges and expenses. Because of these different sales
charges and expenses, the investment performance of the classes will vary. For
more information, including your eligibility to purchase any other class of
shares, contact Mentor Distributors.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
-34-
<PAGE>
CUSTODIAN AND TRANSFER AND DIVIDEND AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and Trust
Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about Class D shares of the Portfolio. The Portfolio's "yield"
for each class of shares is calculated by dividing the Portfolio's annualized
net investment income per share during a recent 30-day period by its net asset
value on the last day of that period. "Total return" for the life of the Class D
shares of the Portfolio through the most recent calendar quarter represents the
actual rate of return on an investment of $500,000 in the Portfolio's Class D
shares over the period. Total return may also be presented for other periods or
based on investment at reduced sales charge levels or at net asset value.
Investment performance for different classes of shares of the Portfolio will
differ. Quotations of yield and total return for a period when an expense
limitation was in effect will be greater than if the limitation had not been in
effect. The Portfolio's performance may be compared to various indices. See the
Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of the Portfolio's investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and does not
predict future performance. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of the Portfolio's
investments, the Portfolio's operating expenses and the class of shares
purchased. Investment performance also often reflects the risks associated with
the Portfolio's investment objectives and policies. These factors should be
considered when comparing the Portfolio's investment results to those of other
mutual funds and other investment vehicles.
-35-
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents re ferred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
MENTOR
PERPETUAL
INTERNATIONAL
PORTFOLIO
----------
PROSPECTUS
----------
Mentor Distributors, Inc.
-36-
<PAGE>
PROSPECTUS
CLASS E SHARES August __, 1996
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO seeks long-term capital
appreciation by investing in a diversified portfolio of equity securities of
issuers outside the United States. Mentor Perpetual Advisors, L.L.C. is the
Portfolio's investment adviser. CLASS E SHARES of the Portfolio are being
offered by this Prospectus principally to institutions and high net-worth
individual investors who invest or maintain their accounts in the Portfolio with
the assistance of a financial consultant or similar service provider. The
Portfolio may use leverage - that is, it may borrow money to purchase additional
portfolio securities, which involves special risks.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. INVESTORS CAN FIND MORE DETAILED
INFORMATION IN THE AUGUST __, 1996 STATEMENT OF ADDITIONAL INFORMATION, AS
AMENDED FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT, CALL MENTOR
DISTRIBUTORS, INC. AT 1-800-869-6042. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23286-0109.
-------------------------
MENTOR DISTRIBUTORS, INC.
DISTRIBUTOR
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-37-
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in
the Portfolio. The following table summarizes an investor's maximum transaction
costs from investing in the Portfolio and expenses the Portfolio expects to
incur in its first full fiscal year. The Example shows the cumulative expenses
attributable to a hypothetical $500,000 investment in the Portfolio over
specified periods.
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees 1.00%
12b-1 Fees 0.00%
Shareholder Service Fee 0.25%
Other Expenses* 0.10%
----
Total Portfolio Operating Expenses* 1.35%
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation. In the absence of this expense limitation, Other Expenses
are expected to be 0.35% and Total Portfolio Operating Expenses are expected to
be 1.60%.
EXAMPLE
An investment of $500,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
1 year $7,000
3 years $18,000
This information is provided to help investors understand the
expenses of investing in the Portfolio and an investor's share of the estimated
operating expenses of the Portfolio. The Example should not be considered a
representation of future performance; actual expenses may be more or less than
those shown.
-38-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO'S INVESTMENT OBJECTIVE IS
LONG-TERM CAPITAL APPRECIATION. The Portfolio is designed for institutional
investors who believe that investment in a diversified portfolio of securities
of issuers located outside the U.S. offers the potential for long-term capital
appreciation.
The Portfolio invests in a diversified portfolio of securities of
issuers located outside the United States. The Portfolio's investments will
normally include common stocks, preferred stocks, securities convertible into
common stocks or preferred stocks, and warrants to purchase common stocks or
preferred stocks. The Portfolio may also invest to a lesser extent in debt
securities and other types of investments if Mentor Perpetual believes they
would help achieve the Portfolio's objective. The Portfolio may hold a portion
of its assets in cash or money market instruments.
The Portfolio will not limit its investments to any particular type
of company. The Portfolio may invest in companies, large or small, whose
earnings are believed to be in a relatively strong growth trend, or in companies
in which significant further growth is not anticipated but whose market value
per share is thought to be undervalued.
It is likely that, at times, a substantial portion of the
Portfolio's assets will be invested in securities of issuers in emerging
markets, including under-developed and developing nations. Investment in
emerging markets are subject to the same risks applicable to foreign investments
generally, although those risks may be increased due to conditions in such
markets. For example, the securities markets and legal systems in emerging
markets may only be in a developmental stage and may provide few, or none, of
the advantages or protections of markets or legal systems available in more
developed countries. Although many of the securities in which the Portfolio may
invest are traded on securities exchanges, they may trade in limited volume, and
the exchanges may not provide all of the conveniences or protections provided by
securities exchanges in more developed markets. The Portfolio may also invest a
substantial portion of its assets in securities traded in the over-the-counter
markets and not on any exchange, which may affect the liquidity of the
investment and expose the Portfolio to the credit risk of its counterparties in
trading those investments. See "Other investment practices -- Foreign
securities."
Fixed-income securities in which the Portfolio may invest will be of
investment grade. A security will be deemed to be of "investment grade" if, at
the time of investment by the Portfolio, the security is rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard & Poor's, or at a comparable
rating by another nationally recognized rating organization. Securities rated
Baa or BBB lack outstanding investment characteristics and have speculative
characteristics and are subject to greater credit and market risks than higher-
rated securities. The Portfolio will not be required to dispose of a security
held by it if the security's rating falls below investment grade, although
Mentor Perpetual will consider whether continued investment in the security is
consistent with the Portfolio's investment objectives. See the Statement of
Additional Information for descriptions of securities ratings assigned by
Moody's and Standard & Poor's.
Mentor Perpetual may under unusual circumstances implement temporary
"defensive" strategies in order to reduce fluctuations in the value of the
Portfolio's assets. At those times, the Portfolio may invest any portion of its
assets in cash or cash equivalents, money market instruments, or other
short-term, high-quality investments Mentor Perpetual considers consistent with
such defensive strategies.
-39-
<PAGE>
OTHER INVESTMENT PRACTICES AND RISKS
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of these practices and certain risks they may involve.
INVESTMENTS IN SMALLER COMPANIES. The Fund may invest a substantial
portion of its assets in securities issued by small companies. Such companies
may offer greater opportunities for capital appreciation than larger companies,
but investments in such companies may involve certain special risks. Such
companies may have limited product lines, markets, or financial resources and
may be dependent on a limited management group. While the markets in securities
of such companies have grown rapidly in recent years, such securities may trade
less frequently and in smaller volume than more widely held securities. The
values of these securities may fluctuate more sharply than those of other
securities, and the Portfolio may experience some difficulty in establishing or
closing out positions in these securities at prevailing market prices. There may
be less publicly- available information about the issuers of these securities or
less market interest in such securities than in the case of larger companies,
and it may take a longer period of time for the prices of such securities to
reflect the full value of their issuers' underlying earnings potential or
assets.
Some securities of smaller issuers may be restricted as to resale or
may otherwise be highly illiquid. The ability of the Portfolio to dispose of
such securities may be greatly limited, and the Portfolio may have to continue
to hold such securities during periods when Mentor Perpetual would otherwise
have sold the security. It is possible that Mentor Perpetual or its affiliates
or clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or at
more favorable prices, than the Portfolio.
FOREIGN SECURITIES. Investments in foreign securities entail certain
risks. The Portfolio may invest in securities principally traded in foreign
markets. Since foreign securities are normally denominated and traded in foreign
currencies, the values of the Portfolio's assets may be affected favorably or
unfavorably by currency exchange rates and exchange control regulations. There
may be less information publicly available about a foreign company than about a
U.S. company, and foreign companies are not generally subject to accounting,
auditing, and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign companies are less liquid and
at times more volatile than securities of comparable U.S. companies. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment or delivery of securities or in the
recovery of the Portfolio's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. In the case of securities issued by
a foreign governmental entity, the issuer may in certain circumstances be unable
or unwilling to meet its obligations on the securities in accordance with their
terms, and the Portfolio may have limited recourse available to it in the event
of default. The laws of some foreign countries may limit the Portfolio's ability
to invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities. The Portfolio may buy or
sell foreign currencies and options and futures contracts on foreign currencies
for hedging purposes in connection with its foreign investments.
BORROWING AND LEVERAGE. The Portfolio may borrow money to invest in
additional portfolio securities. This practice, known as "leverage", increases
the Portfolio's market exposure and its risk. When the Portfolio has borrowed
money for leverage and its investments increase or decrease in value, the
Portfolio's net asset value will normally increase or decrease more than if it
had not borrowed money. The interest the Portfolio must pay on borrowed money
will reduce the amount of any potential gains or increase any losses. The extent
to which the Portfolio will borrow money, and the amount it may borrow, depend
on market conditions and interest rates. Successful use of leverage depends on
Mentor Perpetual's ability to predict market movements correctly.
OPTIONS AND FUTURES. The Portfolio may buy and sell call and put
options to hedge against changes in net asset value or to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and
-40-
<PAGE>
related options, the Portfolio may at times seek to hedge against fluctuations
in net asset value and, to the extent consistent with applicable law, to
increase its investment return.
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage
costs and may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
Index futures and options. The Portfolio may buy and sell index
futures contracts ("index futures") and options on index futures and on indices
for hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index futures"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of the
index between the time when the Portfolio enters into and terminates an index
futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return.
Risks related to options and futures strategies. Options and futures
transactions involve costs and may result in losses. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities held by the Portfolio that are the subject of a
hedge. The successful use by the Portfolio of the strategies described above
further depends on the ability of Mentor Perpetual to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out futures or options positions. Although the Portfolio will enter into options
or futures transactions only if Mentor Perpetual believes that a liquid
secondary market exists for such options or futures contract, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. Certain provisions of the Internal
Revenue Code may limit the Portfolio's ability to engage in options and futures
transactions.
The Portfolio generally expects that its options transactions will
be conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets . The Portfolio's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of Mentor Perpetual, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or
sell futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding options
on futures contracts would exceed 5% of the Portfolio's assets. (For options
that are "in-the-money" at the time of purchase, the amount by which the option
is "in-the-money" is excluded from this calculation.)
REPURCHASE AGREEMENTS AND SECURITIES LOANS. The Portfolio may enter
into repurchase agreements and securities loans. Under a repurchase agreement,
the Portfolio purchases a debt instrument for a relatively short period (usually
not more than one week), which the seller agrees to repurchase at a fixed time
and price, representing the Portfolio's cost plus interest. Under a securities
loan, the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party should become involved in bankruptcy or
insolvency proceedings, it is possible that the Portfolio may be treated as an
unsecured creditor and be required to return the underlying collateral to the
other party's estate.
-41-
<PAGE>
PORTFOLIO TURNOVER. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's annual portfolio turnover
rate is expected to be less than 200% for the current fiscal year.
As a matter of policy, the Trustees will not materially change the
Portfolio's investment objective without shareholder approval. (Any such change
could, of course, result in a change in the nature of the securities in which
the Portfolio may invest and the risks involved in an investment in the
Portfolio.)
MANAGEMENT OF THE PORTFOLIO
The Trustees of Mentor Institutional Trust (the "Trust") are
responsible for generally overseeing the conduct of the Trust's business. MENTOR
PERPETUAL ADVISORS, L.L.C. ("Mentor Perpetual"), located at 901 East Byrd
Street, Richmond, Virginia 23219, acts as investment adviser to the Portfolio
pursuant to a Management Contract between the Trust and Mentor Perpetual. MENTOR
INVESTMENT GROUP, INC. ("Mentor") serves as administrator to the Portfolio.
Mentor Perpetual is an investment advisory firm owned equally by Perpetual plc
and Mentor. The Perpetual organization currently serves as investment adviser
for assets of more than $6 billion. Its clients include 28 unit investment
trusts and other public investment pools for over 150 clients, including private
individuals, charities, pension plans, and life assurance companies. Mentor
Perpetual currently serves as investment adviser to the Mentor Perpetual Global
Portfolio, an open-end mutual fund which is a series of The Mentor Funds.
Investment decisions for the Portfolio are made by a team of investment
professionals at Mentor Perpetual. Mentor is a wholly owned subsidiary of Wheat
First Butcher Singer, Inc. ("Wheat First Butcher Singer"). Wheat First Butcher
Singer, through other subsidiaries, also engages in securities brokerage,
investment banking, and related businesses.
Mentor Perpetual makes investment decisions for the Portfolio and
places the purchase and sale orders for the Portfolio's portfolio transactions.
In selecting broker-dealers, Mentor Perpetual may consider research and
brokerage services furnished to it and its affiliates. Subject to seeking the
best overall terms available, Mentor Perpetual may consider sales of shares of
the Portfolio (and, if permitted by law, of other funds in the Mentor family) as
a factor in the selection of broker-dealers to execute portfolio transactions
for the Portfolio. Mentor Perpetual may at times cause the Portfolio to pay
commissions to broker-dealers affiliated with Mentor Perpetual.
HOW THE PORTFOLIO VALUES ITS SHARES
The Portfolio calculates the net asset value of a share of each
class by dividing the total value of its assets, less liabilities, by the number
of its shares outstanding. Shares are valued as of the close of regular trading
on the New York Stock Exchange each day the Exchange is open. Portfolio
securities for which market quotations are readily available are stated at
market value. Short-term investments that will mature in 60 days or less are
stated at amortized cost, which has been determined to approximate the fair
market value of such investments. All other securities and assets are valued at
their fair values.
Securities quoted in foreign currencies are translated into U.S.
dollars at the current exchange rates or at such other rates as the Trustees may
determine in computing net asset value. As a result, fluctuations in the
-42-
<PAGE>
values of such currencies in relation to the U.S. dollar will affect the net
asset value of Portfolio shares even though there has not been any change in the
values of such securities as quoted in such foreign currencies.
HOW TO BUY SHARES
Class E shares of the Portfolio are available to shareholders who
invest or maintain a Portfolio account with the assistance of a broker-dealer,
financial consultant, or similar service provider (a "financial intermediary").
You can buy Portfolio shares BY COMPLETING THE ENCLOSED NEW ACCOUNT
FORM and sending it to Mentor Distributors along with a check or money order
made payable to Mentor Institutional Trust, or THROUGH YOUR FINANCIAL
INTERMEDIARY. If you purchase shares through your financial intermediary, your
financial intermediary will be responsible for forwarding any necessary
documentation and payments to Mentor Distributors, Inc. ("Mentor Distributors").
Mentor Distributors, 901 East Byrd Street, Richmond, Virginia 23219, serves as
distributor of the Portfolio's shares. Mentor Distributors is not obligated to
sell any specific amount of shares of the Portfolio.
Investors will be required to make minimum initial investments of
$500,000 in Class E shares of the Portfolio and minimum subsequent investments
of $25,000. Investments made through advisory accounts maintained with
investment advisers registered under the Investment Advisers Act of 1940
(including "wrap" accounts) are not subject to these minimum investment
requirements. The minimum initial investment may be waived for current and
retired Trustees, and current and retired employees of the Trust or Mentor
Distributors. The Portfolio reserves the right at any time to change the initial
and subsequent investment minimums required of investors.
Shares are sold at a price based on the net asset value of the
relevant class next determined after Mentor Distributors receives your purchase
order. In most cases, in order to receive that day's public offering price,
Mentor Distributors or your financial intermediary must receive your order
before the close of regular trading on the New York Stock Exchange. If you buy
shares through a financial intermediary, the financial intermediary must ensure
that Mentor Distributors receives your order before the close of regular trading
on the New York Stock Exchange for you to receive that day's public offering
price.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to Mentor Perpetual, or (iii) a combination of
such securities and cash. Purchase of shares of the Portfolio in exchange for
securities is subject in each case to the determination by Mentor Perpetual that
the securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by Mentor Perpetual in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the
Portfolio's next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in the market
price of accepted securities at the time of valuation become the property of the
Portfolio and must be delivered to the Portfolio upon receipt by the investor
from the issuer. A gain or loss for federal income tax purposes would be
realized upon the exchange by an investor that is subject to federal income
taxation, depending upon the investor's basis in the securities tendered. A
shareholder who wishes to purchase shares by exchanging securities should obtain
instructions by calling Mentor Distributors at 1-800-869-6042.
Mentor Distributors, Mentor Perpetual, or affiliates thereof, at
their own expense and out of their own assets, may provide compensation to
dealers in connection with sales of shares of the Portfolio. Such compensation
may include, but is not limited to, financial assistance to dealers in
connection with conferences, sales, or training programs for their employees,
seminars for the public, advertising or sales campaigns, or other
dealer-sponsored special events. In some instances, this compensation may be
made available only to certain dealers whose representatives have sold or are
expected to sell significant amounts of shares. Dealers may not
-43-
<PAGE>
use sales of Portfolio shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc.
In all cases Mentor Perpetual or Mentor Distributors reserves the
right to reject any particular investment.
SHAREHOLDER SERVICING PLAN; FINANCIAL INTERMEDIARIES. The Portfolio
has adopted a Shareholder Servicing Plan (the "Plan") with respect to its Class
E shares. Under the Plan, financial intermediaries may enter into shareholder
service agreements with the Portfolio to provide administrative support to their
customers who hold Class E shares of the Portfolio. In return for providing
these support services, a financial intermediary may receive payments at a rate
not exceeding 0.25% of the average daily net assets of the Portfolio
attributable to the Class E shares held by its customers. These support services
may include, but are not limited to, the following: providing office space,
equipment, telephone facilities, and various personnel, including clerical,
supervisory, and computer personnel, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Portfolio; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Portfolio reasonably requests.
In addition to receiving payments under the Plan, financial
intermediaries may be compensated by Mentor Perpetual and/or Mentor, or
affiliates thereof, for providing administrative support services to holders of
Class E shares of the Portfolio. These payments will be made directly by Mentor
Perpetual and/or Mentor and will not be made from the assets of the Portfolio.
When you effect transactions with the Portfolio (including, for
example, purchases, sales, or redemptions of shares) through a financial
intermediary, your financial intermediary, and not the Portfolio, will be
responsible for taking all steps, and furnishing all necessary documentation, to
effect the transactions. Your financial intermediary may charge for these
services. Certain financial intermediaries may not effect transactions with the
Portfolio for their clients.
HOW TO SELL SHARES
You can sell your shares in the Portfolio to the Portfolio any day
the New York Stock Exchange is open, either directly to the Portfolio or through
your financial intermediary. The Portfolio will only redeem shares for which it
has received payment.
Selling shares directly to the Portfolio. Send a signed letter of
instruction or stock power form, along with any certificates that represent
shares you want to sell, to the Portfolio c/o: Mentor Institutional Trust, P.O.
Box 1357, Richmond, Virginia 23286-0109. Redemptions will be effected at the net
asset value per share of the Portfolio next determined after the receipt by the
Portfolio of redemption instructions in "good order" as described below. Shares
may be redeemed by submitting a written request for redemption to Mentor
Distributors, or to the Portfolio The price you will receive is the net asset
value next calculated after your request is received in proper form. In order to
receive that day's net asset value, your request must be received before the
close of regular trading on the New York Stock Exchange.
Selling shares through your financial intermediary. Your financial
intermediary must receive your request before the close of regular trading on
the New York Stock Exchange to receive that day's net asset value. If you redeem
your shares through a financial intermediary, your financial intermediary will
be responsible for delivering your redemption request and all necessary
documentation to the Portfolio and may charge you for its services.
-44-
<PAGE>
General. The Portfolio generally sends you payment for your shares
the business day after your request is received. Under unusual circumstances,
the Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption by making payment
in whole or in part by securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
A redemption request will be considered to have been made in "good
order" if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to
be redeemed, and identifies the shareholder's Portfolio
account number;
(2) the request is signed by each registered owner exactly as
the shares are registered; and
(3) if the shares to be redeemed were issued in certificate
form, the certificates are endorsed for transfer (or are
accompanied by an endorsed stock power) and accompany the
redemption request.
If you sell shares having a net asset value of $50,000 or more or if you
want your redemption proceeds payable to you at a different address or to
someone else, the signatures of registered owners or their legal representatives
must be guaranteed by a bank, broker-dealer, or certain other financial
institutions. See the Statement of Additional Information for more information
about where to obtain a signature guarantee. Stock power forms are available
from your financial intermediary, Mentor Distributors, and many commercial
banks. Mentor Distributors usually requires additional documentation for the
sale of shares by a corporation, partnership, agent, or fiduciary, or surviving
joint owner. Contact Mentor Distributors for details.
If you are considering redeeming or exchanging shares of the Portfolio or
transferring shares to another person shortly after purchase, you should pay for
those shares with a certified check to avoid any delay in redemption, exchange,
or transfer. Otherwise the Portfolio may delay payment until the purchase price
of those shares has been collected or, if you redeem by telephone, until 15
calendar days after the purchase date.
To eliminate the need for safekeeping, the Portfolio will not issue
certificates for your shares unless you request them.
Mentor Distributors may facilitate any redemption request. There is no extra
charge for this service.
-45-
<PAGE>
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in
the Portfolio worth at least $1,000 for shares of Cash Resource U.S. Government
Money Market Fund (the "Cash Fund"). To exchange your shares, simply complete an
Exchange Authorization Form and send it to Mentor Institutional Trust, c/o
Boston Financial Data Services, Inc., 2 Heritage Drive, North Quincy,
Massachusetts 02171. Exchange Authorization Forms are available by calling or
writing Mentor Distributors or your financial intermediary. For federal income
tax purposes, an exchange is treated as a sale of shares and generally results
in a capital gain or loss. Ask you financial intermediary or Mentor Distributors
for a prospectus relating to the Cash Fund.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management and
have an adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where Mentor Distributors or the Trustees
believe doing so would be in the best interests of the Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. Consult your
financial intermediary or call Mentor Distributors at 1-800-382-0016 before
requesting an exchange. See the Statement of Additional Information to find out
more about the exchange privilege.
HOW DISTRIBUTIONS ARE MADE
The Portfolio distributes net investment income and any net realized capital
gains at least annually. Distributions from capital gains are made after
applying any available capital loss carryovers. All Portfolio distributions will
be invested in additional Portfolio shares, unless the shareholder instructs the
Portfolio otherwise.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
The following is intended principally for shareholders subject to federal
income taxation:
All Portfolio distributions will be taxable to shareholders as ordinary
income, except that any distributions of net capital gain will be taxed as
long-term capital gain, regardless of how long a shareholder has held the shares
(although the loss on a sale of shares held for six months or less will be
treated as long-term capital loss to the extent of any capital gain distribution
received with respect to those shares). Distributions will be taxable as
described above whether received in cash or in shares through the reinvestment
of distributions. Early in each year the Trust will notify shareholders of the
amount and tax status of distributions paid by the Portfolio for the preceding
year. In buying or selling securities for the Portfolio, Mentor Perpetual will
not normally take into account the effect any purchase or sale of securities
will have on the tax positions of the Portfolio's shareholders.
Shareholders of the Portfolio who are U.S. citizens or residents may be able
to claim a foreign tax credit or deduction on their U.S. income tax returns with
respect to foreign taxes paid by the Portfolio. If, at the end of the fiscal
year of the Portfolio, more than 50% of the Portfolio's total assets are
represented by securities of foreign corporations, the Portfolio intends to make
an election permitted by the Internal Revenue Code to treat any foreign taxes it
paid as paid by its shareholders. In that case, shareholders who are U.S.
citizens, U.S. corporations, and, in some cases, U.S. residents will be required
to include in U.S. taxable income their pro rata share of such taxes, but may
then be entitled to claim a foreign tax credit or deduction (but not both) for
their share of such taxes.
-46-
<PAGE>
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends and distributions also may be subject to
state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of the Portfolio, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
MENTOR INSTITUTIONAL TRUST
Mentor Institutional Trust is a Massachusetts business trust organized on
February 8, 1994 as IMG Institutional Trust. A copy of the Agreement and
Declaration of Trust, which is governed by Massachusetts law, is on file with
the Secretary of State of The Commonwealth of Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into five
series, one representing the Portfolio, the others representing other Portfolios
with varying investment objectives and policies. The Portfolio's shares are
currently divided into four classes. Only the Portfolio's Class E shares are
offered by the Prospectus. The Portfolio also offers other classes of shares
with different sales charges and expenses. Because of these different sales
charges and expenses, the investment performance of the classes will vary. For
more information, including your eligibility to purchase any other class of
shares, contact Mentor Distributors.
Each share has one vote, with fractional shares voting proportionally.
Shares of each class will vote together as a single class except when required
by law or determined by the Trustees. Shares of the Portfolio are freely
transferable, are entitled to dividends as declared by the Trustees, and, if the
Portfolio were liquidated, would receive the net assets of the Portfolio. The
Trust may suspend the sale of shares at any time and may refuse any order to
purchase shares. Although the Portfolio and the Trust are not required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees, or to take other actions as provided in the
Agreement and Declaration of Trust.
CUSTODIAN AND TRANSFER AND DIVIDEND AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and Trust
Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about Class E shares of the Portfolio. The Portfolio's "yield"
for each class of shares is calculated by dividing the Portfolio's annualized
net investment income per share during a recent 30-day period by its net asset
value on the last day of that period. "Total return" for the life of the Class E
shares of the Portfolio through the most recent calendar quarter represents the
actual rate of return on an investment of $500,000 in the Portfolio's Class E
shares over the period. Total return may also be presented for other periods or
based on investment at reduced sales charge levels or at net asset value.
Investment performance for different classes of shares of the Portfolio will
differ. Quotations
-47-
<PAGE>
of yield and total return for a period when an expense limitation was in effect
will be greater than if the limitation had not been in effect. The Portfolio's
performance may be compared to various indices. See the Statement of Additional
Information. Information may be presented in advertisements about the Portfolio
describing the background and professional experience of the Portfolio's
investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and does not
predict future performance. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of the Portfolio's
investments, the Portfolio's operating expenses and the class of shares
purchased. Investment performance also often reflects the risks associated with
the Portfolio's investment objectives and policies. These factors should be
considered when comparing the Portfolio's investment results to those of other
mutual funds and other investment vehicles.
-48-
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents re ferred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
MENTOR
PERPETUAL
INTERNATIONAL
PORTFOLIO
----------
PROSPECTUS
----------
Mentor Distributors, Inc.
-49-
<PAGE>
MENTOR INSTITUTIONAL TRUST
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
AUGUST __, 1996
This Statement of Additional Information relates to the Mentor Perpetual
International Portfolio (the "Portfolio"), a series of shares of beneficial
interest of Mentor Institutional Trust (the "Trust"). The Portfolio currently
offers four classes of shares (Class A, Class B, Class D and Class E shares).
This Statement is not a prospectus and should be read in conjunction with the
relevant prospectus of the Portfolio. A copy of any prospectus can be obtained
upon request made to Mentor Distributors, Inc., the Trust's distributor, at P.O.
Box 1357, Richmond, Virginia 23286-0109, or calling Mentor Distributors at
1-(800) 869-6042.
TABLE OF CONTENTS
CAPTION PAGE
GENERAL ...................................................................2
INVESTMENT RESTRICTIONS....................................................2
CERTAIN INVESTMENT TECHNIQUES..............................................4
MANAGEMENT OF THE TRUST...................................................18
PRINCIPAL HOLDERS OF SECURITIES...........................................22
INVESTMENT ADVISORY AND OTHER SERVICES....................................22
BROKERAGE.................................................................25
DETERMINATION OF NET ASSET VALUE..........................................27
TAX STATUS................................................................28
THE DISTRIBUTOR...........................................................30
INDEPENDENT ACCOUNTANTS...................................................31
CUSTODIAN.................................................................31
PERFORMANCE INFORMATION...................................................31
SHAREHOLDER LIABILITY.....................................................36
OFFICER OF MENTOR PERPETUAL...............................................36
<PAGE>
GENERAL
Mentor Institutional Trust (the "Trust") is a Massachusetts business
trust organized on February 8, 1994 as IMG Institutional Trust. Mentor
Perpetual Advisors, L.L.C. ("Mentor Perpetual") serves as investment adviser to
the Portfolio. Mentor Investment Group, Inc. ("Mentor") serves as administrator
to the Portfolio.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to the Portfolio without approval by the holders of a majority of the
outstanding shares of that Portfolio, the Portfolio may not:
1. Purchase any security (other than U.S. Government securities) if
as a result: (i) as to 75% of such Portfolio's total assets, more
than 5% of the Portfolio's total assets (taken at current value)
would then be invested in securities of a single issuer, or (ii)
more than 25% of the Portfolio's total assets would be invested
in a single industry.
2. Acquire more than 10% of the voting securities of any issuer.
3. Act as underwriter of securities of other issuers except to the
extent that, in connection with the disposition of portfolio
securities, it may be deemed to be an underwriter under certain
federal securities laws.
4. Issue any class of securities which is senior to the Portfolio's
shares of beneficial interest.
5. Purchase or sell securities on margin (but the Portfolio may
obtain such short-term credits as may be necessary for the
clearance of transactions). (Margin payments in connection with
transactions in futures contracts, options, and other financial
instruments are not considered to constitute the purchase of
securities on margin for this purpose.)
6. Purchase or sell real estate or interests in real estate,
including real estate mortgage loans, although it may purchase
and sell securities which are secured by real estate and
securities of companies that invest or deal in real estate or
real estate limited partnership interests. (For purposes of this
restriction, investments by the Portfolio in mortgage-backed
securities and other securities representing interests in
mortgage pools shall not constitute the purchase or sale of real
estate or interests in real estate or real estate mortgage
loans.)
-60-
<PAGE>
7. Borrow more than 331/3% of the value of its total assets less all
liabilities and indebtedness (other than such borrowings) not
represented by senior securities.
8. Purchase or sell commodities or commodity contracts, except that
the Portfolio may purchase or sell financial futures contracts,
options on futures contracts, and futures contracts, forward
contracts, and options with respect to foreign currencies, and
may enter into swap transactions.
9. Make loans, except by purchase of debt obligations in which the
Portfolio may invest consistent with its investment policies or
by entering into repurchase agreements.
In addition, it is contrary to the current policy of the Portfolio,
which policy may be changed without shareholder approval, to:
1. Invest in oil, gas, or other mineral leases, rights, or royalty
contracts or in real estate (although the Portfolio may invest in
securities of issuers that invest or deal in the foregoing types
of assets or securities that are secured by or represent
interests in real estate).
2. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale,
and (c) repurchase agreements maturing in more than seven days,
if, as a result, more than 15% of the Portfolio's net assets
(taken at current value) would then be invested in securities
described in (a), (b), and (c).
3. Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary
brokerage commissions and as a result of which not more than 5%
of its total assets (taken at current value) would be invested in
such securities, or except as part of a merger, consolidation, or
other acquisition.
4. Make short sales or purchase puts, calls, straddles, spreads, or
any combination thereof (other than futures contracts, options on
futures contracts or indices, and options on foreign currencies).
5. Invest in securities of any issuer if, to the knowledge of the
Portfolio, officers and Trustees of the Portfolio and officers
and directors of Commonwealth who beneficially own more than 0.5%
of the shares or securities of that issuer together own more than
5%.
-61-
<PAGE>
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above as fundamental or to the extent
designated as such in the relevant prospectus with respect to the Portfolio, the
other investment policies described in this Statement or in such prospectus are
not fundamental and may be changed by approval of the Trustees. As a matter of
policy, the Trustees would not materially change the Portfolio's investment
objectives without shareholder approval.
The Investment Company Act of 1940, as amended (the "1940 Act"),
provides that a "vote of a majority of the outstanding voting securities" of the
Portfolio means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, and (2) 67% or more of the shares present
at a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques
in which the Portfolio may engage, and certain of the risks they may entail.
Forward Commitments
The Portfolio may enter into contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") if the Portfolio holds, and maintains until the settlement date in
a segregated account, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. Forward
commitments may be considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Portfolio's other assets. Where such purchases are made through dealers,
the Portfolios rely on the dealer to consummate the sale. The dealer's failure
to do so may result in the loss to the Portfolio of an advantageous yield or
price.
Although the Portfolio will generally enter into forward commitments
with the intention of acquiring securities for its portfolio or for delivery
pursuant to options contracts it has entered into, the Portfolio may dispose of
a commitment prior to settlement if its investment adviser deems it appropriate
to do so. The Portfolio may realize short-term profits or losses upon the sale
of forward commitments.
Repurchase Agreements
The Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Trust's present intention to enter into repurchase agreements only with
member banks of the Federal Reserve System and securities dealers meeting
certain criteria as to creditworthiness and financial condition established by
the Trustees of the Trust and only with respect to obligations of the U.S.
government
-62-
<PAGE>
or its agencies or instrumentalities or other high quality short term debt
obligations. Repurchase agreements may also be viewed as loans made by the
Portfolio which are collateralized by the securities subject to repurchase. The
investment adviser will monitor such transactions to ensure that the value of
the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, the Portfolio could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale including accrued
interest are less than the resale price provided in the agreement including
interest. In addition, if the seller should be involved in bankruptcy or
insolvency proceedings, the Portfolio may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if the
Portfolio is treated as an unsecured creditor and required to return the
underlying collateral to the seller's estate.
When-Issued Securities
The Portfolio may from time to time purchase securities on a
"when-issued" basis. Debt securities are often issued on this basis. The price
of such securities, which may be expressed in yield terms, is fixed at the time
a commitment to purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase. During the period between purchase and
settlement, no payment is made by the Portfolio and no interest accrues to the
Portfolio. To the extent that assets of the Portfolio are held in cash pending
the settlement of a purchase of securities, that Portfolio would earn no income.
While the Portfolio may sell its right to acquire when-issued securities prior
to the settlement date, the Portfolio intends actually to acquire such
securities unless a sale prior to settlement appears desirable for investment
reasons. At the time the Portfolio makes the commitment to purchase a security
on a when-issued basis, it will record the transaction and reflect the amount
due and the value of the security in determining the Portfolio's net asset
value. The market value of the when- issued securities may be more or less than
the purchase price payable at the settlement date. The Portfolio will establish
a segregated account in which it will maintain cash and U.S. Government
Securities or other high-grade debt obligations at least equal in value to
commitments for when- issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date.
Options
The Portfolio may purchase and sell put and call options on its
portfolio securities to enhance investment performance and to protect against
changes in market prices.
-63-
<PAGE>
Covered call options. The Portfolio may write covered call options on
its securities to realize a greater current return through the receipt of
premiums than it would realize on its securities alone. Such option transactions
may also be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call option,
the Portfolio gives up some or all of the opportunity to profit from an increase
in the market price of the securities covering the call option during the life
of the option. The Portfolio retains the risk of loss should the price of such
securities decline. If the option expires unexercised, the Portfolio realizes a
gain equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Portfolio realizes a gain
or loss equal to the difference between the Portfolio's cost for the underlying
security and the proceeds of sale (exercise price minus commissions) plus the
amount of the premium.
The Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. The Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
Covered put options. The Portfolio may write covered put options in
order to enhance its current return. Such options transactions may also be used
as a limited form of hedging against an increase in the price of securities that
the Portfolio plans to purchase. A put option gives the holder the right to
sell, and obligates the writer to buy, a security at the exercise price at any
time before the expiration date. A put option is "covered" if the writer
segregates cash and high-grade short-term debt obligations or other permissible
collateral equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
The Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
-64-
<PAGE>
Purchasing put and call options. The Portfolio may also purchase put
options to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Portfolio must pay. These costs will reduce any profit the Portfolio
might have realized had it sold the underlying security instead of buying the
put option.
The Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
The Portfolio may also purchase put and call options to enhance its
current return.
Options on foreign securities. The Trust may, on behalf of the
Portfolio, purchase and sell options on foreign securities if in the opinion of
its investment advisor the investment characteristics of such options, including
the risks of investing in such options, are consistent with the Portfolio's
investment objectives. It is expected that risks related to such options will
not differ materially from risks related to options on U.S. securities. However,
position limits and other rules of foreign exchanges may differ from those in
the U.S. In addition, options markets in some countries, many of which are
relatively new, may be less liquid than comparable markets in the U.S.
Risks involved in the sale of options. Options transactions involve
certain risks, including the risks that the Portfolio's investment adviser will
not forecast interest rate or market movements correctly, that the Portfolio may
be unable at times to close out such positions, or that hedging transactions may
not accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of the Portfolio's
investment adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, the Portfolio may be forced to continue to
hold, or to purchase at a fixed price, a security on which it has sold an option
at a time when its investment adviser believes it is inadvisable to do so.
-65-
<PAGE>
Higher than anticipated trading activity or order flow or other
unforeseen events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Trust's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible that the Trust
and other clients of the Portfolios' investment advisers may be considered such
a group. These position limits may restrict the Trust's ability to purchase or
sell options on particular securities.
Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that reason,
it may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification
as a "regulated investment company" under the Internal Revenue Code, may also
restrict the Trust's use of options.
Futures Contracts
In order to hedge against the effects of adverse market changes the
Portfolio may buy and sell futures contracts. The Portfolio may also, to the
extent permitted by applicable law, buy and sell futures contracts and options
on futures contracts to increase the Portfolio's current return. All such
futures and related options will, as may be required by applicable law, be
traded on exchanges that are licensed and regulated by the Commodity Futures
Trading Commission (the "CFTC").
Index Futures Contracts and Options. The Portfolio may invest in debt
index futures contracts and stock index futures contracts, and in related
options. A debt index futures contract is a contract to buy or sell units of a
specified debt index at a specified future date at a price agreed upon when the
contract is made. A unit is the current value of the index. Debt index futures
in which the Portfolios are presently expected to invest are not now available,
although such futures contracts are expected to become available in the future.
A stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index is composed of
100 selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 100 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 100 Index, contracts are
to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180, one
contract would be worth $18,000 (100 units x $180). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon
-66-
<PAGE>
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract. For example, if the Portfolio enters into a futures
contract to buy 100 units of the S&P 100 Index at a specified future date at a
contract price of $180 and the S&P 100 Index is at $184 on that future date, the
Portfolio will gain $400 (100 units x gain of $4). If the Portfolio enters into
a futures contract to sell 100 units of the stock index at a specified future
date at a contract price of $180 and the S&P 100 Index is at $182 on that future
date, the Portfolio will lose $200 (100 units x loss of $2).
The Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge the Portfolio's investments successfully using futures
contracts and related options, the Portfolio must invest in futures contracts
with respect to indexes or sub- indexes the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.
Options on index futures contracts are similar to options on securities
except that options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the holder would assume the underlying futures
position and would receive a variation margin payment of cash or securities
approximating the increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to purchasing and selling call and put options on
index futures contracts, each of the Portfolios which may purchase and sell
index futures contracts may purchase and sell call and put options on the
underlying indexes themselves to the extent that such options are traded on
national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount". This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier".
-67-
<PAGE>
The Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. The Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to the Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
Margin Payments. When the Portfolio purchases or sells a futures
contract, it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage of
the amount of the futures contract. This amount is known as "initial margin".
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Portfolio upon termination of the
contract, assuming the Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when the Portfolio sells a futures contract and the value of the
underlying index rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the value of the index underlying the futures contract. Conversely, if the price
of the underlying index falls below the delivery price of the contract, the
Portfolio's futures position increases in value. The broker then must make a
variation margin payment equal to the difference between the delivery price of
the futures contract and the value of the index underlying the futures contract.
When the Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
Special Risks of Transactions in Futures Contracts and Related Options
Liquidity risks. Positions in futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market for such
futures. Although the Trust intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular time.
If there is not a liquid secondary market at a particular time, it may not be
possible to close a futures position at such time and, in the event of adverse
price movements, the Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event financial futures
-68-
<PAGE>
are used to hedge portfolio securities, such securities will not generally be
sold until the financial futures can be terminated. In such circumstances, an
increase in the price of the portfolio securities, if any, may partially or
completely offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
such a market will develop. Although the Portfolio generally will purchase only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that the Portfolio would have to exercise the
options in order to realize any profit.
Hedging risks. There are several risks in connection with the use by the
Portfolio of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying index or
movements in the prices of the Portfolio's securities which are the subject of a
hedge. The Portfolio's investment adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in its
judgment, correlate closely with movements in the value of the underlying index
and the Portfolio's portfolio securities sought to be hedged.
Successful use of futures contracts and options by the Portfolio for
hedging purposes is also subject to its investment adviser's ability to predict
correctly movements in the direction of the market. It is possible that, where
the Portfolio has purchased puts on futures contracts to hedge its portfolio
against a decline in the market, the index on which the puts are purchased may
increase in value and the value of securities held in the portfolio may decline.
If this occurred, the Portfolio would lose money on the puts and also experience
a decline in value in its portfolio securities. In addition, the prices of
futures, for a number of reasons, may not correlate perfectly with movements in
the underlying index due to certain market distortions. First, all participants
in the futures market are subject to margin deposit requirements. Such
requirements may cause investors to close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
index and futures markets. Second, the margin requirements in the futures
markets are less onerous than margin requirements in the securities markets in
general, and as a result the futures markets may attract more speculators than
the securities markets do. Increased participation by speculators in the futures
markets may also cause temporary price distortions. Due to the possibility of
price distortion, even a correct forecast of general market trends by the
Portfolio's investment adviser may still not result in a successful hedging
transaction over a very short time period.
Other Risks. The Portfolio will incur brokerage fees in connection with
its futures and options transactions. In addition, while futures contracts and
options on futures will be purchased
-69-
<PAGE>
and sold to reduce certain risks, those transactions themselves entail certain
other risks. Thus, while the Portfolio may benefit from the use of futures and
related options, unanticipated changes in interest rates or stock price
movements may result in a poorer overall performance for the Portfolio than if
it had not entered into any futures contracts or options transactions. Moreover,
in the event of an imperfect correlation between the futures position and the
portfolio position which is intended to be protected, the desired protection may
not be obtained and the Portfolio may be exposed to risk of loss, which may be
unlimited.
Segregation of Assets
The Portfolio may at times segregate assets in respect of certain
transactions in which the Portfolio enters into a commitment to pay money or
deliver securities at some future date (such as futures contracts). Any such
segregated account will be maintained by the Trust's custodian and may contain
cash, U.S. government securities, liquid high grade debt obligations, or other
appropriate assets.
Reverse Repurchase Agreements
The Portfolio may enter into reverse repurchase agreements in which the
Portfolio sells securities and agrees to repurchase them at a mutually agreed
date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
The Portfolio may also enter into reverse repurchase agreements in which
the Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
Reverse repurchase agreements may be viewed as a borrowing by the
Portfolio, secured by the security which is the subject of the agreement. In
addition to the general risks involved in leveraging, reverse repurchase
agreements involve the risk that, in the event of the bankruptcy or insolvency
of the Portfolio's counterparty, the Portfolio would be unable to recover the
security which is the subject of the agreement, the amount of cash or other
property transferred by the counterparty to the Portfolio under the agreement
prior to such insolvency or bankruptcy is less than the value of the security
subject to the agreement, or the Portfolio may be delayed or prevented, due to
such insolvency or bankruptcy, from using such cash or property or may be
required to return it to the counterparty or its trustee or receiver.
-70-
<PAGE>
Loans of Portfolio Securities
The Portfolio may lend its portfolio securities, provided: (1) the loan
is secured continuously by collateral consisting of U.S. Government Securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) the Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities of any Portfolio loaned will not at any
time exceed one-third (or such other limit as the Trustee may establish) of the
total assets of the Portfolio. In addition, it is anticipated that the Portfolio
may share with the borrower some of the income received on the collateral for
the loan or that it will be paid a premium for the loan. Before the Portfolio
enters into a loan, its investment adviser considers all relevant facts and
circumstances including the creditworthiness of the borrower. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower,
the Portfolio retains the right to call the loans at any time on reasonable
notice, and it will do so in order that the securities may be voted by the
Portfolio if the holders of such securities are asked to vote upon or consent to
matters materially affecting the investment. The Portfolio will not lend
portfolio securities to borrowers affiliated with the Portfolio.
Foreign Securities
The Portfolio may invest in foreign securities and in certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks.
Investments in foreign securities may involve considerations different
from investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and possible
consequent illiquidity, greater volatility in price, the possible imposition of
withholding or confiscatory taxes, the possible adoption of foreign governmental
restrictions affecting the payment of principal and interest, expropriation of
assets, nationalization, or other adverse political or economic developments.
Foreign companies may not be subject to auditing and financial reporting
standards and requirements comparable to those which apply to U.S. companies.
Foreign brokerage commissions and other fees are generally higher than in the
United States. It may be more difficult to obtain and enforce a judgment against
a foreign issuer.
In addition, to the extent that the Portfolio's foreign investments are
not United States dollar-denominated, the Portfolio may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.
-71-
<PAGE>
In determining whether to invest in securities of foreign issuers, the
investment advisor of the Portfolio seeking current income will consider the
likely impact of foreign taxes on the net yield available to the Portfolio and
its shareholders. Income received by the Portfolio from sources within foreign
countries may be reduced by withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. It is impossible to determine the effective rate
of foreign tax in advance since the amount of the Portfolio's assets to be
invested in various countries is not known, and tax laws and their
interpretations may change from time to time and may change without advance
notice. Any such taxes paid by the Portfolio will reduce its net income
available for distribution to shareholders.
Foreign Currency Transactions
The Portfolio may engage in currency exchange transactions to protect
against uncertainty in the level of future foreign currency exchange rates and
to increase current return. The Portfolio may engage in both "transaction
hedging" and "position hedging".
When it engages in transaction hedging, the Portfolio enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its portfolio securities. The Portfolio will engage in transaction hedging when
it desires to "lock in" the U.S. dollar price of a security it has agreed to
purchase or sell, or the U.S. dollar equivalent of a dividend or interest
payment in a foreign currency. By transaction hedging the Portfolio will attempt
to protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold or on
which the dividend or interest payment is declared, and the date on which such
payments are made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with transaction hedging.
The Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and purchase and sell foreign
currency futures contracts.
For transaction hedging purposes the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the Portfolio the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives the Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. The Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable
-72-
<PAGE>
and when, in the opinion of its investment adviser, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties likely
to meet their contractual obligations.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which the Portfolio expects to purchase. In connection
with position hedging, the Portfolio may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. The Portfolio may also
purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of the
Portfolio's portfolio securities at the expiration or maturity of a forward or
futures contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency the Portfolio is obligated to deliver and if
a decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security or
securities of the Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to the Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
The Portfolio may also seek to increase its current return by purchasing
and selling foreign currency on a spot basis, and by purchasing and selling
options on foreign currencies and on foreign currency futures contracts, and by
purchasing and selling foreign currency forward contracts.
-73-
<PAGE>
Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Portfolio will normally
purchase or sell foreign currency futures contracts and related options only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board of
trade will exist for any particular contract or option or at any particular
time. In such event, it may not be possible to close a futures or related option
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on its
futures positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when the Portfolio's investment adviser believes that a liquid secondary market
exists
-74-
<PAGE>
for such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence exchange rates
and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
Settlement Procedures. Settlement procedures relating to the Portfolio's
investments in foreign securities and to the Portfolio's foreign currency
exchange transactions may be more complex than settlements with respect to
investments in debt or equity securities of U.S. issuers, and may involve
certain risks not present in the Portfolio's domestic investments. For example,
settlement of transactions involving foreign securities or foreign currency may
occur within a foreign country, and the Portfolio may be required to accept or
make delivery of the underlying securities or currency in conformity with any
applicable U.S. or foreign restrictions or regulations, and may be required to
pay any fees, taxes or charges associated with such delivery. Such investments
may also involve the risk that an entity involved in the settlement may not meet
its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
-75-
<PAGE>
MANAGEMENT OF THE TRUST
The following table provides biographical information with respect to
each Trustee and officer of the Trust. Each Trustee who is an "interested
person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk.
Position Held Principal Occupation
Name and Address with Portfolio During Past 5 Years
- ---------------- -------------- -------------------
Stanley F. Pauley Trustee Chairman and Chief Executive
Officer, E.R. Carpenter
Company Incorporated;
Trustee, The Mentor Funds;
Trustee, Cash Resource Trust.
Louis W. Moelchert, Jr. Trustee Vice President of Business
and Finance, University of
Richmond; Trustee, The
Mentor Funds; Trustee, Cash
Resource Trust.
Thomas F. Keller Trustee Dean, Fuqua School of
Business, Duke University;
Trustee, The Mentor Funds;
Trustee, Cash Resource Trust.
Arnold H. Dreyfuss Trustee Retired. Formerly, Chairman
and Chief Executive Officer,
Hamilton Beach/Proctor-Silex,
Inc.; Trustee, The Mentor
Funds; Trustee, Cash Resource
Trust.
*Daniel J. Ludeman Chairman;
Trustee Chairman and Chief Executive
Officer since July 1991,
Mentor Investment Group,
Inc.; Managing Director of
Wheat, First Securities, Inc.
since August 1989; Managing
Director of Wheat First
Butcher Singer since June
1991; Director, Wheat First
Securities, Inc. and Mentor
Income Fund, Inc.; Chairman
and Trustee, The Mentor
Funds; Chairman and Trustee,
Cash Resource Trust.
-76-
<PAGE>
Troy A. Peery, Jr. Trustee President, Heilig-Meyers
Company. Trustee, The Mentor
Funds; Trustee, Cash Resource
Trust.
Paul F. Costello President Managing Director, Mentor
Investment Group, Inc. and
Wheat First Butcher Singer;
President, Mentor Income
Fund, The Mentor Funds, and
Cash Resource Trust;
Executive Vice President and
Chief Administrative Officer,
America's Utility Fund, Inc.;
Director, Mentor Perpetual
Advisers, L.L.C. and Mentor
Trust Company; formerly,
Director, President and Chief
Executive Officer, First
Variable Life Insurance
Company; President and Chief
Financial Officer, Variable
Investors Series Trust;
President and Treasurer,
Atlantic Capital & Research,
Inc.; Vice President and
Treasurer, Variable Stock
Portfolio, Inc., Monarch
Investment Series Trust, and
GEICO Tax Advantage Series
Trust; Vice President,
Monarch Life Insurance
Company, GEICO Investment
Services Company, Inc.,
Monarch Investment Services
Company, Inc., and
Springfield Life Insurance
Company.
Terry L. Perkins Treasurer Vice President, Mentor
Investment Group, Inc.;
Treasurer, Cash Resource
Trust, Mentor Income Fund
Inc., The Mentor Funds, and
America's Utility Fund, Inc.;
formerly, Treasurer and
Comptroller, Ryland Capital
Management, Inc.
-77-
<PAGE>
Michael Wade Assistant
Treasurer Associate Vice President,
Mentor Investment Group, Inc.
since April 1994; Assistant
Treasurer, Cash Resource
Trust, Mentor Income Fund,
Inc., The Mentor Funds, and
America's Utility Fund, Inc.;
formerly, Senior Accountant,
Wheat First Butcher Singer,
Inc., April 1993 through
March 1994; Audit Senior, BDO
Seidman, July 1989 through
March 1993.
John M. Ivan Clerk Managing Director since
October 1992, Director of
Compliance since October
1992, Senior Vice President
from 1990 to October 1992,
and Assistant General Counsel
since 1985, Wheat, First
Securities, Inc.; Clerk, Cash
Resource Trust; Secretary,
The Mentor Funds.
The table below shows the fees paid to each Trustee by the Trust for the
1995 fiscal year and the fees paid to each Trustee by all funds in the Mentor
family (including the Trust) during the 1995 calendar year.
Total compensation
Aggregate compensation from all
Trustees from the Trust complex funds
Daniel J. Ludeman $ 0 $ 0
Arnold H. Dreyfuss 200 17,200
Thomas F. Keller 200 14,700
Louis W. Moelchert, Jr. 200 16,700
Stanley F. Pauley 150 16,675
Troy A. Peery, Jr. 150 16,175
- -------------
The Trustees do not receive pension or retirement benefits from the
Trust.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such
-78-
<PAGE>
indemnification would relieve any officer or Trustee of any liability to the
Trust or its Shareholders by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of his or her duties. The Trust, at its
expense, provides liability insurance for the benefit of its Trustees and
officers.
PRINCIPAL HOLDERS OF SECURITIES
As of June 1, 1996, the officers and Trustees of the Trust owned as a
group less than one percent of the outstanding shares of the Portfolio. To the
knowledge of the Trust, no person owned of record or beneficiary more than 5% of
the outstanding shares of the Portfolio as of that date, except the following:
SHAREHOLDER PERCENTAGE SHARES
Crestar Bank TTEE 58.82% 400,000
Carpenter Co PSP
UA DTD 6/30/74
P.O. Box 26665
Richmond, VA 23261
Wachovia Bank TTEE 41.18% 280,000
Helig-Meyers PSP
Settlement Section M31051
P.O. Box 3075
Winston-Salem, NC 27102
INVESTMENT ADVISORY AND OTHER SERVICES
Mentor Perpetual acts as investment adviser to the Portfolio pursuant to
a Management Contract with the Trust. Mentor Investment Group acts as
administrator to the Portfolio pursuant to an Administration Agreement with the
Trust. Subject to the supervision and direction of the Trustees, Mentor
Perpetual manages the Portfolio's portfolio in accordance with the stated
policies of the Portfolio and of the Trust. Mentor Perpetual makes investment
decisions for the Portfolio and places the purchase and sale orders for
portfolio transactions. Mentor furnishes the Portfolio with certain statistical
and research data, clerical help, and certain accounting, data processing, and
other services required by the Portfolio, assists in preparation of certain
reports to shareholders of the Portfolio, tax returns, and filings with the SEC
and state Blue Sky authorities, and generally assists in all aspects of the
Portfolio's operations. Mentor Perpetual and Mentor bear all their expenses in
connection with the performance of their services. In addition, Mentor Perpetual
and Mentor pay the salaries of all officers and employees who are employed by
them and the Trust.
-79-
<PAGE>
Mentor Perpetual provides the Portfolio with investment officers who are
authorized to execute purchases and sales of securities. Investment decisions
for the Portfolio and for the other investment advisory clients of Mentor
Perpetual and its affiliates are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or more other
clients are selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as possible, averaged as
to price and allocated between such clients in a manner which in Mentor
Perpetual's opinion is equitable to each and in accordance with the amount being
purchased or sold by each. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients. In the case of short-term investments, the Treasury area of Wheat
First Butcher Singer handles purchases and sales under guidelines approved by
investment officers of the Trust. Mentor Perpetual employs professional staffs
of portfolio managers who draw upon a variety of resources, including Wheat for
research information for the Portfolio.
The proceeds received by the Portfolio for each issue or sale of its
shares, and all income, earnings, profits, and proceeds thereof, subject only to
the rights of creditors, are specifically allocated to the Portfolio, and
constitute the underlying assets of the Portfolio. The underlying assets of the
Portfolio will be segregated on the Trust's books of account, and will be
charged with the liabilities in respect of the Portfolio and with a share of the
general liabilities of the Trust. Expenses with respect to any two or more
Portfolios of the Trust may be allocated in proportion to the net asset values
of the respective Portfolios except where allocations of direct expenses can
otherwise be fairly made.
Expenses incurred in the operation of the Portfolio or otherwise
allocated to the Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, investor servicing fees and expenses,
charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges and charges relating to corporate matters are borne
by the Portfolio.
Under its Management Contract dated May 15, 1996, the Portfolio pays a
quarterly fee to Mentor Perpetual based on the average net assets of the
Portfolio, as determined at the close of each business day during the quarter at
the annual rate of 1.00% of average net assets.
-80-
<PAGE>
The Management Contract and the Administration Agreement are subject to
annual approval (commencing in 1997) by (i) the Trustees or (ii) vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Portfolio, provided that in either event the continuance is also approved by
a majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust, Mentor Perpetual, or Mentor, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Management
Contract is terminable without penalty, on not more than sixty days' notice and
not less than thirty days' notice, by the Trustees, by vote of the holders of a
majority of the Portfolio's shares, or by Mentor Perpetual. The Administration
Agreement is terminable without penalty, immediately upon notice, by the
Trustees or by vote of the holders of a majority of the Portfolio's shares, and
on not less than thirty days' notice by Mentor. Each of the agreements will
terminate automatically in the event of its assignment.
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors with respect to the Portfolio's Class A, Class B
shares, and Class E shares. Pursuant to the Service Plan, financial institutions
will enter into shareholder service agreements with the Portfolio to provide
administrative support services to their customers who from time to time may be
record or beneficial owners of shares of the Portfolio. In return for providing
these support services, a financial institution may receive payments from the
Portfolio at a rate not exceeding .25% of the average daily net assets of the
relevant class of shares of the Portfolio owned by the financial institution's
customers for whom it is the holder of record or with whom it has a servicing
relationship. The Service Plan is designed to stimulate financial institutions
to render administrative support services to the Portfolio and its shareholders.
These administrative support services include, but are not limited to, the
following functions: providing office space, equipment, telephone facilities,
and various personnel including clerical, supervisory, and computer personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries
regarding the Portfolio; assisting clients in changing dividend options, account
designations and addresses; and providing such other services as the Portfolio
reasonably requests. The Service Plan may be terminated with respect to a
particular class at any time by (i) a vote of the majority of the Trustees who
are not "interested persons" of the Trust (as defined in the 1940 Act), (ii) a
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of a particular class, or (iii) Mentor Distributors on 60 days notice.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Perpetual and/or Mentor, or affiliates
thereof, for providing administrative support services to holders of Class A,
Class B, or Class E shares of the Portfolio. These payments will be made
directly by Mentor Perpetual and/or Mentor, as applicable, and will not be made
from the assets of the Portfolio.
-81-
<PAGE>
BROKERAGE
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by the Portfolio of
negotiated brokerage commissions. Such commissions vary among different brokers.
A particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price paid by the Portfolio usually includes an undisclosed dealer
commission or mark-up. In underwritten offerings, the price paid by the
Portfolio includes a disclosed, fixed commission or discount retained by the
underwriter or dealer. It is anticipated that most purchases and sales of
portfolio securities by the Portfolio investing primarily in certain
fixed-income securities will be with the issuer or with underwriters of or
dealers in those securities, acting as principal. Accordingly, the Portfolio
would not ordinarily pay significant brokerage commissions with respect to
securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")), from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, Mentor Perpetual receives brokerage and research services and other
similar services from many broker-dealers with which it places the Portfolio's
portfolio transactions and from third parties with which these broker-dealers
have arrangements. These services include such matters as general economic and
market reviews, industry and company reviews, evaluations of investments,
recommendations as to the purchase and sale of investments, newspapers,
magazines, pricing services, quotation services, news services and personal
computers utilized by Mentor Perpetual's managers and analysts. Where the
services referred to above are not used exclusively by Mentor Perpetual for
research purposes, Mentor Perpetual, based upon its own allocations of expected
use, bears that portion of the cost of these services which directly relates to
its non-research use. Some of these services are of value to Mentor Perpetual
and its affiliates in advising various of its clients (including the Portfolio),
although not all of these services are necessarily useful and of value in
managing the Portfolio.
Mentor Perpetual places all orders for the purchase and sale of
portfolio investments for the Portfolio and buys and sells investments for the
Portfolio through a substantial number of brokers and dealers. Mentor Perpetual
seeks the best overall terms available for the Portfolio, except to the extent
it may be permitted to pay higher brokerage commissions as described below. In
doing so, Mentor Perpetual, having in mind the Portfolio's best interests,
considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security or
other investment, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience and
financial stability of the broker-dealer involved and the quality of service
rendered by the broker-dealer in other transactions.
-82-
<PAGE>
As permitted by Section 28(e) of the 1934 Act, and by the Management
Contract, Mentor Perpetual may cause the Portfolio to pay a broker-dealer which
provides "brokerage and research services" (as defined in the 1934 Act) to them
an amount of disclosed commission for effecting securities transactions on stock
exchanges and other transactions for the Portfolio on an agency basis in excess
of the commission which another broker-dealer would have charged for effecting
that transaction. Mentor Perpetual's authority to cause the Portfolio to pay any
such greater commissions is also subject to such policies as the Trustees may
adopt from time to time. Mentor Perpetual does not currently intend to cause the
Portfolio to make such payments. It is the position of the staff of the
Securities and Exchange Commission that Section 28(e) does not apply to the
payment of such greater commissions in "principal" transactions. Accordingly,
Mentor Perpetual will use its best efforts to obtain the best overall terms
available with respect to such transactions, as described above.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to such other policies as the Trustees
may determine, Mentor Perpetual may consider sales of shares of the Portfolio
(and, if permitted by law, of the other Mentor funds) as a factor in the
selection of broker-dealers to execute portfolio transactions for the Portfolio.
The Trustees have determined that portfolio transactions for the
Portfolio may be effected through Wheat. The Trustees have adopted certain
policies incorporating the standards of Rule 17e-l issued by the SEC under the
1940 Act which requires, among other things, that the commissions paid to Wheat
must be reasonable and fair compared to the commissions, fees, or other
remuneration received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
Wheat will not participate in brokerage commissions given by the Portfolio to
other brokers or dealers. Over-the-counter purchases and sales are transacted
directly with principal market makers except in those cases in which better
prices and executions may be obtained elsewhere. The Portfolio will in no event
effect principal transactions with Wheat in over-the-counter securities in which
Wheat makes a market.
Under rules adopted by the SEC, Wheat may not execute transactions for
the Portfolio on the floor of any national securities exchange, but may effect
transactions for the Portfolio by transmitting orders for execution and
arranging for the performance of this function by members of the exchange not
associated with Wheat. Wheat will be required to pay fees charged to those
persons performing the floor brokerage elements out of the brokerage
compensation it receives from the Portfolio. The Trust has been advised by Wheat
that on most transactions, the floor brokerage generally constitutes from 5% and
10% of the total commissions paid.
-83-
<PAGE>
DETERMINATION OF NET ASSET VALUE
The Portfolio determines net asset value per share of each class of
shares each day the New York Stock Exchange (the "Exchange") is open. Currently,
the Exchange is closed Saturdays, Sundays, and the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July,
Labor Day, Thanksgiving, and Christmas.
Securities for which market quotations are readily available are valued
at prices which, in the opinion of the Trustees or Mentor Perpetual, most nearly
represent the market values of such securities. Currently, such prices are
determined using the last reported sale price or, if no sales are reported (as
in the case of some securities traded over-the-counter), the last reported bid
price, except that certain U.S. Government securities are stated at the mean
between the last reported bid and asked prices. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value following procedures approved by the Trustees. Liabilities are
deducted from the total, and the resulting amount is divided by the number of
shares of the particular class outstanding.
Reliable market quotations are not considered to be readily available
for long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. These investments are stated at fair
value on the basis of valuations furnished by pricing services approved by the
Trustees, which determine valuations for normal, institutional- size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders.
If any securities held by the Portfolio are restricted as to resale,
Mentor Perpetual determines their fair values. The fair value of such securities
is generally determined as the amount which the Portfolio could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Portfolio in connection with such disposition). In addition,
specific factors are also generally considered, such as the cost of the
investment, the market value of any unrestricted securities of the same class
(both at the time of purchase and at the time of valuation), the size of the
holding, the prices of any recent transactions or offers with respect to such
securities and any available analysts' reports regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of the Portfolio's shares are computed as of such
-84-
<PAGE>
times. Also, because of the amount of time required to collect and process
trading information as to large numbers of securities issues, the values of
certain securities (such as convertible bonds, U.S. Government securities, and
tax-exempt securities) are determined based on market quotations collected
earlier in the day at the latest practicable time prior to the close of the
Exchange. Occasionally, events affecting the value of such securities may occur
between such times and the close of the Exchange which will not be reflected in
the computation of the Portfolio's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at their fair value following procedures approved by
the Trustees.
TAX STATUS
The Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, the Portfolio will not be subject to federal
income tax on any of its net investment income or net realized capital gains
that are distributed to shareholders. As a series of Massachusetts business
trust, the Portfolio will not under present law be subject to any excise or
income taxes in Massachusetts.
In order to qualify as a "regulated investment company," the Portfolio
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other dispositions of stock, securities, or foreign currencies, and
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies; (b) derive less than 30% of its gross income from the sale or other
disposition of certain assets (including stock and securities) held less than
three months; (c) diversify its holdings so that, at the close of each quarter
of its taxable year, (i) at least 50% of the value of its total assets consists
of cash, cash items, U.S. Government Securities, and other securities limited
generally with respect to any one issuer to not more than 5% of the total assets
of the Portfolio and not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any issuer (other than U.S. Government Securities). In
order to receive the favorable tax treatment accorded regulated investment
companies and their shareholders, moreover, the Portfolio must in general
distribute at least 90% of its interest, dividends, net short-term capital gain,
and certain other income each year.
An excise tax at the rate of 4% will be imposed on the excess, if any,
of the Portfolio's "required distribution" over its actual distributions in any
calendar year. Generally, the "required distribution" is 98% of the Portfolio's
ordinary income for the calendar year plus 98% of its capital gain net income
recognized during the one-year period ending on October 31 (or December 31, if
the Portfolio so elects) plus undistributed amounts from prior years. Each
-85-
<PAGE>
Portfolio intends to make distributions sufficient to avoid imposition of the
excise tax. Distributions declared by the Portfolio during October, November, or
December to shareholders of record on a date in any such month and paid by the
Portfolio during the following January will be treated for federal tax purposes
as paid by the Portfolio and received by shareholders on December 31 of the year
in which declared.
Under federal income tax law, a portion of the difference between the
purchase price of zero-coupon securities in which the Portfolio has invested and
their face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the net investment income of the Portfolio which must be
distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.
The Portfolio is required to withhold 31% of all income dividends and
capital gain distributions, and 31% of the gross proceeds of all redemptions of
Portfolio shares, in the case of any shareholder who does not provide a correct
taxpayer identification number, about whom the Portfolio is notified that the
shareholder has under reported income in the past, or who fails to certify to
the Portfolio that the shareholder is not subject to such withholding.
Tax-exempt shareholders are not subject to these back-up withholding rules so
long as they furnish the Portfolio with a proper certification.
Foreign currency-denominated securities and related hedging transactions
The Portfolio's transactions in foreign currencies, foreign currency-denominated
debt securities, and certain foreign currency options, futures contracts, and
forward contracts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value of
the foreign currency concerned.
If more than 50% of the Portfolio's assets at year end consists of the
debt and equity securities of foreign corporations, the Portfolio may elect to
permit shareholders to claim a credit or deduction on their income tax returns
for their pro rata portion of qualified taxes paid by the Portfolio to foreign
countries. In such a case, shareholders will include in gross income from
foreign sources their pro rata shares of such taxes. A shareholder's ability to
claim a foreign tax credit or deduction in respect of foreign taxes paid by the
Portfolio may be subject to certain limitations imposed by the Code, as a result
of which a shareholder may not get a full credit or deduction for the amount of
such taxes. Shareholders who do not itemize on their federal income tax returns
may claim a credit (but no deduction) for such foreign taxes.
Investment by the Portfolio in certain "passive foreign investment
companies" could subject the Portfolio to a U.S. federal income tax or other
charge on the proceeds from the sale of its investment in such a company;
however, this tax can be avoided by making an election to mark such investments
to market annually or to treat the passive foreign investment company as a
"qualified electing fund."
-86-
<PAGE>
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to state
and federal taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state or local taxes. The foregoing
discussion relates solely to U.S. federal income tax law. Non-U.S. investors
should consult their tax advisers concerning the tax consequences of ownership
of shares of the Portfolio, including the possibility that distributions may be
subject to a 30% United States withholding tax (or a reduced rate of withholding
provided by treaty).
THE DISTRIBUTOR
Mentor Distributors, Inc. ("Mentor Distributors") is the Trust's
distributor and service agent and is a wholly-owned subsidiary of Wheat First
Butcher Singer. Mentor Distributors is acting on a best efforts basis in the
continuous offering of the Trust's shares.
The Portfolio makes payments to Mentor Distributors in accordance with
its Distribution Plan in respect of its Class B shares adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Plan").
Continuance of the Plan is subject to annual approval by a vote of the
Trustees, including a majority of the Trustees who are not interested persons of
the Portfolio and who have no direct or indirect interest in the Plan or related
arrangements (the "Qualified Trustees"), cast in person at a meeting called for
that purpose. All material amendments to the Plan must be likewise approved by
the Trustees and the Qualified Trustees. The Plan may not be amended in order to
increase materially the costs which the Portfolio may bear for distribution
pursuant to such Plan without also being approved by a majority of the
outstanding Class B shares of the Portfolio. The Plan terminates automatically
in the event of its assignment and may be terminated without penalty, at any
time, by a vote of a majority of the Qualified Trustees or by a vote of a
majority of the outstanding Class B shares of the Portfolio.
If Plan payments are made to reimburse Mentor Distributors for payments
to dealers based on the average net asset value of Portfolio shares attributable
to shareholders for whom the dealers are designated as the dealer of record,
"average net asset value" attributable to a shareholder account means the
product of (i) the Portfolio's average daily share balance of the account and
(ii) the Portfolio's average daily net asset value per share (or the average
daily net asset value per share of the class, if applicable). For administrative
reasons, Mentor Distributors may enter into agreements with certain dealers
providing for the calculation of "average net asset value" on the basis of
assets of the accounts of the dealer's customers on an established day in each
quarter.
-87-
<PAGE>
Financial institutions receiving payments from Mentor Distributors as
described above may be required to comply with various state and federal
regulatory requirements, including among others those regulating the activities
of securities brokers or dealers.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, are the Portfolio's independent auditors, providing audit services, tax
return review, and other tax consulting services.
CUSTODIAN
The custodian of the Portfolio, Investors Fiduciary Trust Company, is
located at 127 West 10th Street, Richmond, Virginia 64105. A custodian's
responsibilities include generally safeguarding and controlling the Portfolio's
cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on the Portfolio's investments.
PERFORMANCE INFORMATION
Total return for each class of shares is determined by calculating the
actual investment return on a $1,000 (or a larger amount depending on the
minimum investment for a particular class) investment in that class at the
beginning of the applicable period and at the maximum public offering price for
Class A shares, and net asset value for all other classes of shares. Total
return may also be presented for other periods. Total return calculations assume
deduction of the Portfolio's maximum front-end or contingent deferred sales
charge, if applicable, and reinvestment of all Portfolio distributions at net
asset value on their respective investment dates.
The Portfolio's yield is presented for a specified thirty-day period
(the "base period"). Yield for each class of shares is based on the amount
determined by (i) calculating the aggregate amount of dividends and interest
earned by the Portfolio during the base period less expenses accrued for that
period, and (ii) dividing that amount by the product of (A) the average daily
number of shares of the Portfolio outstanding during the base period and
entitled to receive dividends and (B) the per share maximum public offering
price for Class A shares and net asset value per share for all other
classes on the last day of the base period. The result is annualized on a
compounding basis to determine the yield. For this calculation, interest earned
on debt obligations held by the Portfolio is generally calculated using the
yield to maturity (or first expected call date) of such obligations based on
their market values (or, in the case of receivables-backed securities such as
GNMA's, based on cost). Dividends on equity securities are accrued daily at
their stated dividend rates.
-88-
<PAGE>
Total return or yield may be presented for other periods or without
giving effect to any front-end or contingent deferred sales charge. Any
quotation of total return or yield not reflecting such sales charges would be
reduced if such sales charges were reflected.
ALL DATA FOR THE PORTFOLIO ARE BASED ON PAST PERFORMANCE AND DO NOT
PREDICT FUTURE RESULTS.
Independent statistical agencies measure the Portfolio's investment
performance and publish comparative information showing how the Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time to
time, the Portfolio may distribute these comparisons to its shareholders or to
potential investors. THE AGENCIES LISTED BELOW MEASURE PERFORMANCE BASED ON THE
BASIS OF THEIR OWN CRITERIA RATHER THAN ON THE BASIS OF THE STANDARDIZED
PERFORMANCE MEASURES DESCRIBED ABOVE.
LIPPER ANALYTICAL SERVICES, INC. distributes mutual fund rankings
monthly. The rankings are based on total return performance calculated
by Lipper, reflecting generally changes in net asset value adjusted for
reinvestment of capital gains and income dividends. They do not reflect
deduction of any sales charges. Lipper rankings cover a variety of
performance periods, for example year-to-date, 1-year, 5-year, and
10-year performance. Lipper classifies mutual funds by investment
objective and asset category.
MORNINGSTAR, INC. distributes mutual fund ratings twice a month. the
ratings are divided into five groups: highest, above average, neutral,
below average and lowest. They represent a fund's historical risk/reward
ratio relative to other funds with similar objectives. The performance
factor is a weighted-average assessment of the Portfolio's 3- year,
5-year, and 10-year total return performance (if available) reflecting
deduction of expenses and sales charges. Performance is adjusted using
quantitative techniques to reflect the risk profile of the fund. The
ratings are derived from a purely quantitative system that does not
utilize the subjective criteria customarily employed by rating agencies
such as Standard & Poor's Corporation and Moody's Investor Service, Inc.
WEISENBERGER'S MANAGEMENT RESULTS publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return
calculated by Weisenberger for periods such as year-to-date, 1-year,
3-year, 5-year and 10-year performance. Mutual funds are ranked in
general categories (e.g., international bond, international equity,
municipal bond, and maximum capital gain). Weisenberger rankings do not
reflect deduction of sales charges or fees.
Independent publications may also evaluate the Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the descriptions
appearing below. From time to time the Portfolio may distribute evaluations by
or excerpts from these publications to its shareholders or to
-89-
<PAGE>
potential investors. The following illustrates the types of information
provided by these publications.
BUSINESS WEEK publishes mutual fund rankings in its Investment Figures
of the Week column. The rankings are based on 4-week and 52-week total
return reflecting changes in net asset value and the reinvestment of all
distributions. They do not reflect deduction of any sales charges.
Portfolios are not categorized; they compete in a large universe of over
2,000 funds. The source for rankings is data generated by Morningstar,
Inc.
INVESTOR'S BUSINESS DAILY publishes mutual fund rankings on a daily
basis. The rankings are depicted as the top 25 funds in a given
category. The categories are based loosely on the type of fund, e.g.,
growth funds, balanced funds, U.S. government funds, GNMA funds, growth
and income funds, corporate bond funds, etc. Performance periods for
sector equity funds can vary from 4 weeks to 39 weeks; performance
periods for other fund groups vary from 1 year to 3 years. Total return
performance reflects changes in net asset value and reinvestment of
dividends and capital gains. The rankings are based strictly on total
return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds; an
A rating denotes the top 10%; an A- is given to the top 15%, etc.
BARRON'S periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical
Services. The Lipper total return data reflects changes in net asset
value and reinvestment of distributions, but does not reflect deduction
of any sales charges. The performance periods vary from short-term
intervals (current quarter or year-to-date, for example) to long-term
periods (five-year or ten-year performance, for example). Barron's
classifies the funds using the Lipper mutual fund categories, such as
Capital Appreciation Portfolios, Growth Portfolios, U.S. Government
Portfolios, Equity Income Portfolios, Global Portfolios, etc.
Occasionally, Barron's modifies the Lipper information by ranking the
funds in asset classes. "Large funds" may be those with assets in excess
of $25 million; "small funds" may be those with less than $25 million in
assets.
THE WALL STREET JOURNAL publishes its Mutual Portfolio Scorecard on a
daily basis. Each Scorecard is a ranking of the top-15 funds in a given
Lipper Analytical Services category. Lipper provides the rankings based
on its total return data reflecting changes in net asset value and
reinvestment of distributions and not reflecting any sales charges. The
Scorecard portrays 4-week, year-to-date, one-year and 5-year
performance; however, the ranking is based on the one-year results. The
rankings for any given category appear approximately once per month.
FORTUNE magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Portfolios are
placed in stock or bond fund
-90-
<PAGE>
categories (for example, aggressive growth stock funds, growth stock
funds, small company stock funds, junk bond funds, Treasury bond funds
etc.), with the top-10 stock funds and the top-5 bond funds appearing in
the rankings. The rankings are based on 3- year annualized total return
reflecting changes in net asset value and reinvestment of distributions
and not reflecting sales charges. Performance is adjusted using
quantitative techniques to reflect the risk profile of the fund.
MONEY magazine periodically publishes mutual fund rankings on a database
of funds tracked for performance by Lipper Analytical Services. The
funds are placed in 23 stock or bond fund categories and analyzed for
five-year risk adjusted return. Total return reflects changes in net
asset value and reinvestment of all dividends and capital gains
distributions and does not reflect deduction of any sales charges.
Grades are conferred (from A to E): the top 20% in each category receive
an A, the next 20% a B, etc. To be ranked, a fund must be at least one
year old, accept a minimum investment of $25,000 or less and have had
assets of at least $25 million as of a given date.
FINANCIAL WORLD publishes its monthly Independent Appraisals of Mutual
Portfolios, a survey of approximately 1000 mutual funds. Portfolios are
categorized as to type, e.g., balanced funds, corporate bond funds,
global bond funds, growth and income funds, U.S. government bond funds,
etc. To compete, funds must be over one year old, have over $1 million
in assets, require a maximum of $10,000 initial investment, and should
be available in at least 10 states in the United States. The funds
receive a composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund versus its
category, as well as taking into account its risk, reward to risk, and
fees. An A+ rated fund is one of the best, while a D- rated fund is one
of the worst. The source for Financial World rating is Schabacker
investment management in Rockville, Maryland.
FORBES magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond
funds, municipal bond funds, etc. Data sources include Lipper Analytical
Services and CDA Investment Technologies. The ratings are based strictly
on performance at net asset value over the given cycles. Portfolios
performing in the top 5% receive an A+ rating; the top 15% receive an A
rating; and so on until the bottom 5% receive an F rating. Each fund
exhibits two ratings, one for performance in "up" markets and another
for performance in "down" markets.
KIPLINGER'S PERSONAL FINANCE MAGAZINE (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three-
and five-year total return performance reflecting changes in net asset
value and reinvestment of dividends and capital gains and not reflecting
deduction of any sales charges. Portfolios are ranked by tenths: a rank
of 1 means that a fund was among the highest 10% in total return for the
period; a rank of 10 denotes the bottom 10%. Portfolios compete in
categories of similar
-91-
<PAGE>
funds -- aggressive growth funds, growth and income funds, sector funds,
corporate bond funds, global governmental bond funds, mortgage-backed
securities funds, etc. Kiplinger's also provides a risk-adjusted grade
in both rising and falling markets. Portfolios are graded against others
with the same objective. The average weekly total return over two years
is calculated. Performance is adjusted using quantitative techniques to
reflect the risk profile of the fund.
U.S. NEWS AND WORLD REPORT periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre
& Co., a Boston research firm. Over 2000 funds are tracked and divided
into 10 equity, taxable bond and tax-free bond categories. Portfolios
compete within the 10 groups and three broad categories. The OPI is a
number from 0-100 that measures the relative performance of funds at
least three years old over the last 1, 3, 5 and 10 years and the last
six bear markets. Total return reflects changes in net asset value and
the reinvestment of any dividends and capital gains distributions and
does not reflect deduction of any sales charges. Results for the longer
periods receive the most weight.
THE 100 BEST MUTUAL PORTFOLIOS YOU CAN BUY (1992), authored by Gordon K.
Williamson. The author's list of funds is divided into 12 equity and
bond fund categories, and the 100 funds are determined by applying four
criteria. First, equity funds whose current management teams have been
in place for less than five years are eliminated. (The standard for bond
funds is three years.) Second, the author excludes any fund that ranks
in the bottom 20 percent of its category's risk level. Risk is
determined by analyzing how many months over the past three years the
fund has underperformed a bank CD or a U.S. Treasury bill. Third, a fund
must have demonstrated strong results for current three-year and
five-year performance. Fourth, the fund must either possess, in Mr.
Williamson's judgment, "excellent" risk-adjusted return or "superior"
return with low levels of risk. Each of the 100 funds is ranked in five
categories: total return, risk/volatility, management, current income
and expenses. The rankings follow a five- point system: zero designates
"poor"; one point means "fair"; two points denote "good"; three points
qualify as a "very good"; four points rank as "superior"; and five
points mean "excellent."
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation, or instrument entered into or executed
by the Trust or the Trustees. The Agreement and Declaration of Trust provides
for indemnification out of the Portfolio's property for all loss and expense of
any shareholder held personally liable for the obligations of the Portfolio.
Thus the risk of a shareholder's incurring financial loss on
-92-
<PAGE>
account of shareholder liability is limited to circumstances in which the
Portfolio would be unable to meet its obligations.
OFFICER OF MENTOR PERPETUAL
ROD SMYTH MANAGING DIRECTOR, MENTOR PERPETUAL
Mr. Smyth, Managing Director of Mentor Perpetual, is responsible for overseeing
the investments and day-to-day operations of the Mentor Perpetual joint venture.
From his office in Richmond, Virginia he is the primary contact for marketing
and client service for the joint venture. Mr. Smyth has 12 years of investment
experience, including positions as market strategist (two years), portfolio
manager (five years) and institutional salesperson (five years). His previous
employers include Baring Securities, Ulster Bank Investment Managers, Citicorp
Scrimgeour Vickers, and Nomura International. He holds an M.A. in economics,
with honors, from Dundee University.
-93-
<PAGE>
The Statement of Additional Information of Mentor Institutional Trust and the
SNAP Fund and various financial information in respect thereof, which is
included in Part B to Amendment No. 5 to the Registrant's Registration Statement
on Form N-1A (File No. 33-80784) filed on March 11, 1996, is incorporated herein
by reference.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statement and Supporting Schedules (Incorporated by
reference to Parts A and B of Amendment No. 5 to the Registrant's
Registration Statement on Form N-1A (File No. 33-80784) filed on
March 11, 1996)
(1) Mentor Cash Management Portfolio, Mentor Fixed-Income Portfolio
and Mentor Intermediate Duration Portfolio:
Statement of Assets and Liabilities -- October 31, 1995.
Statement of Operations -- period ended October 31, 1995.
Statement of Changes in Net Assets -- period ended October 31,
1995.
Financial Highlights
Notes to Financial Statements
Portfolio of Investments -- October 31, 1995.
Independent Auditors' Report
(2) SNAP Fund (unaudited)
Statement of Assets and Liabilities -- December 31, 1995.
Statement of Operations -- six months ended December 31, 1995.
Statement of Changes in Net Assets -- six months ended December
31, 1995.
Financial Highlights.
Notes to Financial Statements.
Portfolio of Investments -- December 31, 1995.
(b) Exhibits
(1)
(A) - Agreement and Declaration of Trust.1
(B) - Amendment to Agreement and Declaration of Trust.4
(2) - Bylaws.1
(3) - Inapplicable.
-94-
<PAGE>
(4)
(A) - Form of certificate representing shares of beneficial interest
for each of the Portfolios.1
(B) - Portions of Agreement and Declaration of Trust
Relating to Shareholders' Rights.1
(C) - Portions of Bylaws Relating to Shareholders'
Rights.1
(5)
(A) - Form of Management Contract (Mentor Intermediate Duration and
Mentor Fixed-Income Portfolios).1
(B) - Form of Management Contract (SNAP Fund).5
(C) - Form of Management Contract (Mentor International Portfolio)8
(6) (A) - Form of Distribution Agreement.2
(6) (B) - Form of Assignment of Distribution Agreement.5
(7) - Inapplicable. (8)
(A) - Form of Custody Agreement.1
(B) - Form of Custody Agreement (SNAP Fund).5
(C) - Form of Transfer Agency and Services Agreement.3
(D) - Form of Transfer Agency and Services Agreement (SNAP
Fund).5
(9) (A) - Form of Administration Agreement.1
(B) - Form of Shareholder Services Plan.9
(10) - Opinion of counsel, including consent.3
(11) - Consent of Independent Accountants.9
(12) - Inapplicable.
(13) - Inapplicable.
(14) - Inapplicable.
(15) - Form of Plan of Distribution Pursuant to Rule 12b-1.9
(16) - Schedule of Computation of Performance Information 7
(17) - Financial Data Schedule -- Mentor Cash Management
Portfolio 8 Financial Data Schedule -- Mentor
Intermediate Duration Portfolio 8 Financial Data
Schedule -- Mentor Fixed Income Portfolio 8
Financial Data Schedule -- SNAP Fund 8
(18) - Form of Rule 18f-3 Plan9
1 Incorporated herein by reference to the Registrant's initial
Registration Statement on Form N-1A under the investment Company Act of
1940 filed on April 15, 1994.
2 Incorporated herein by reference to Registrant's initial Registration
Statement on Form N-1A under the Securities Act of 1933 on Form N-1A
filed on June 28,1994.
3 Incorporated herein by reference to Pre-Effective Amendment No. 2 to the
Registrants' Registration Statement on Form N-1A filed on November 18,
1994.
4 Incorporated herein by reference to Post-Effective Amendment No. 1 to
the Registrants' Registration Statement on Form N-1A filed on July 3,
1995.
-95-
<PAGE>
5 Incorporated herein by reference to Post-Effective Amendment No. 2 to
the Registrants' Registration Statement on Form N-1A filed on July 24,
1995.
6 Incorporated herein by reference to Post-Effective Amendment No. 3 to
the Registrants' Registration Statement on Form N-1A filed on September
5, 1995.
7 Incorporated herein by reference to Post-Effective Amendment No. 5 to
the Registrants' Registration Statement on Form N-1A filed on March 11,
1994.
8 Incorporated herein by reference to Post-Effective Amendment No. 6 to
the Registrants' Registration Statement on Form N-1A filed on May 24,
1996.
9 Filed herewith.
-96-
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Record Holders of Securities
The following table shows the number of holders of record of shares of
beneficial interest of each series of shares of beneficial interest of Mentor
Institutional Trust as of May 15, 1996.
Number of Record
Series Holders
Mentor Cash Management Portfolio 68
SNAP Fund 453
Mentor Intermediate Duration Portfolio 10
Mentor Fixed-Income Portfolio 195
Mentor Perpetual International Portfolio 1
Item 27. Indemnification
The information required by this item is incorporated herein by
reference from the Registrant's initial Registration Statement on Form N-1A
under the Investment Company Act of 1940 (File No. 811-8484).
Item 28. Business and Other Connections of Investment Adviser
(a) Commonwealth Investment Counsel, Inc., the investment adviser of the
Mentor Cash Management, Fixed-Income, and Intermediate Duration Portfolios and
the SNAP Fund, serves as investment adviser to Cash Resource Trust, Mentor
Balanced Portfolio, Mentor Quality Income Portfolio, and Menter Short-Duration
Income Portfolio, each of which is an open-end investment company, and Mentor
Income Fund, Inc., a closed-end investment company.
The following is additional information with respect to the directors
and officers of Commonwealth Investment Counsel, Inc.:
-97-
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
BUSINESS, PROFESSION,
POSITION WITH VOCATION OR EMPLOYMENT
NAME INVESTMENT ADVISER DURING THE PAST TWO FISCAL YEARS
<S> <C>
John G. Davenport President; Director None
William F. Johnston, III Senior Vice President None
P. Michael Jones Senior Vice President None
R. Preston Nuttall Senior Vice President Formerly, Senior Vice President,
Capitoline Investment Services, 919
East Main Street, Richmond, VA 23219
Mary A. Beeghly Vice President None
John J. Kelly Vice President None
Steven C. Henderson Vice President None
Stephen R. McClelland Associate Vice President Formerly, Associate Vice President,
Mentor Investment Group, Inc., 901
East Byrd Street, Richmond, VA 23219
Thomas Lee Souders Treasurer Managing Director and Chief Financial
Officer, Wheat, First Securities, Inc.,
901 East Byrd Street, Richmond, VA 23219;
Trustee, Mentor Series Trust, 901 East
Byrd Street, Richmond, VA 23219; formerly,
Manager of Internal Audit, Heilig-Myers;
formerly, Manager, Peat Marwick & Mitchell
& Company
-98-
<PAGE>
John Michael Ivan Secretary Managing Director, Senior Vice President
and Assistant General Counsel, Wheat,
First Securities, Inc., 901 East Byrd Street,
Richmond, VA 23219; Managing Director and
Assistant Secretary, Wheat First Butcher Singer,
Inc. (formerly WFS Financial Corporation),
901 East Byrd Street, Richmond, VA 23219; Clerk,
Cash Resource Trust, 901 East Byrd Street,
Richmond, VA 23219; Secretary, The Mentor
Funds, 901 East Byrd Street, Richmond, VA 23219
</TABLE>
(b) The following is additional information with respect to Mentor
Perpetual Advisors, L.L.C., the investment adviser to the Mentor Perpetual
International Portfolio:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
BUSINESS, PROFESSION,
POSITION WITH VOCATION OR EMPLOYMENT
NAME INVESTMENT ADVISER DURING THE PAST TWO FISCAL YEARS
<S> <C>
Scott A. McGlashan President Director, Perpetual Portfolio
Management Limited
Martyn Arbib Director Chairman, Perpetual Portfolio
Management Limited
Roger C. Cornick Director Deputy Chairman - Marketing,
Perpetual Portfolio Management
Limited
Paul F. Costello Director Managing Director, Mentor
Investment Group, Inc. and
Managing Director, Wheat First
Butcher Singer, Inc.
-99-
<PAGE>
Daniel J. Ludeman Director Chairman and Chief Executive
Officer, Mentor Investment Group;
Director, Wheat First Securities,
Inc.; Managing Director, Wheat
First Butcher Singer, Inc.
David S. Mossop Director Director, Perpetual Portfolio
Management Limited
Richard J. Rossi Director Managing Director, Mentor
Investment Group, Inc.
</TABLE>
Item 29. Principal Underwriters
(a) Mentor Distributors, Inc. currently is acting as principal
underwriter for The Mentor Funds and Cash Resource Trust.
(b) The following is information concerning officers and directors of
Mentor Distributors, Inc.
NAME AND PRINCIPAL POSITION AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITERS WITH REGISTRANT
Peter J. Quinn, Jr. President and --
901 East Byrd Street Director, Mentor
Richmond, VA 23219 Distributors, Inc.
Paul F. Costello Senior Vice President, President
901 East Byrd Street Mentor Distributors,
Richmond, VA 23219 Inc.
Thomas Lee Souders Treasurer, Mentor --
901 East Byrd Street Distributors, Inc.
Richmond, VA 23219
John Mark Harris Secretary, Mentor --
901 East Byrd Street Distributors, Inc.
Richmond, VA 23219
John Michael Ivan Assistant Secretary, Secretary
901 East Byrd Street Mentor Distributors,
Richmond, VA 23219 Inc.
-100-
<PAGE>
(c) Registrant has no principal underwriter who is not an affiliate of
the Registrant.
Item 30. Location of Accounts and Records
Persons maintaining physical possession of accounts, books and
other documents required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and the Rules promulgated thereunder are Registrant's
Secretary, John M. Ivan, Registrant's custodians, Investors Fiduciary Trust
Company ("IFTC") (all Portfolios other than SNAP Fund), and Central Fidelity
National Bank (SNAP Fund only), and Registrant's transfer agents, State Street
Bank and Trust Company (through Boston Financial Data Services, Inc. ("BFDS"))
(all Portfolios other than SNAP Fund), and Central Fidelity National Bank (SNAP
Fund only). The address of the Secretary is 901 East Byrd Street, Richmond,
Virginia, 23219. The address of BFDS is 2 Heritage Drive, North Quincy,
Massachusetts 02171. The address of IFTC is 127 West 10th Street, Kansas City,
Missouri, 64105. The address of Central Fidelity National Bank is 1021 East Cary
Street, P.O. Box 27602, Richmond, Virginia 23261.
Item 31. Management Services
None.
Item 32. Undertakings
(a) The Registrant undertakes to furnish to each person to whom a prospectus
of the Registrant is delivered a copy of the Registant's latest annual
report to shareholders, upon request and without charge.
(b) Inapplicable.
(c) Inapplicable.
(d) The undersigned Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting on the removal of a trustee or
trustees when requested in writing to do so by the holders of at least
10% of the Registrant's outstanding voting securities and in connection
with such meeting to comply with the provisions of Section 16(c) of the
Investment Company Act of 1940 relating to shareholder communications.
NOTICE
A copy of the Agreement and Declaration of Trust of Mentor
Institutional Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts, and notice is hereby given that this instrument is executed on
behalf of the Registrant by an officer of the Registrant as an officer and not
individually and that the obligations of or arising out of this instrument are
not binding upon any of the Trustees, officers, or shareholders individually but
are binding only upon the assets and property of the Registrant.
-101-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Amendment to the Registration Statement to be signed on behalf of the
undersigned, thereunto duly authorized, in the City of Richmond, and the
Commonwealth of Virginia on this 2nd day of July, 1996.
MENTOR INSTITUTIONAL TRUST
By: /s/ Paul F. Costello
Paul F. Costello
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE
Trustee
_______________________________
Arnold H. Dreyfuss
Trustee
_______________________________
Thomas F. Keller
* Trustee July 2, 1996
_______________________________
Daniel J. Ludeman
* Trustee July 2, 1996
_______________________________
Louis W. Moelchert, Jr.
-102-
<PAGE>
* Trustee June 28, 1996
_______________________________
Stanley F. Pauley
* Trustee July 2, 1996
_______________________________
Troy A. Peery, Jr.
/s/ Paul F. Costello President July 2, 1996
_______________________________ (Principal Executive
Paul F. Costello Officer)
/s/ Terry L. Perkins Treasurer July 2, 1996
_______________________________ (Principal Financial
Terry L. Perkins and Accounting
Officer)
*By /s/ Paul F. Costello July 2, 1996
_______________________________
Paul F. Costello
Attorney-in-Fact
-103-
<PAGE>
Exhibit Index
9b. Form of Shareholder Services Plan
11. Consent of Independent Accountants
15. Form of Plan of Distribution Pursuant to Rule 12b-1
18. Form of Rule 18f-3 Plan
-104-
Exhibit 9b.
MENTOR INSTITUTIONAL TRUST
SHAREHOLDER SERVICES PLAN
This Shareholder Services Plan ("Plan") is adopted as of this day of
August, 1996, by the Board of Trustees of Mentor Institutional Trust (the
"Trust"), a Massachusetts business trust, with respect to certain classes of
shares ("Classes") of the Portfolios of the Trust (the "Funds") set forth in
exhibits hereto.
1. This Plan is adopted to allow the Trust to make payments as contemplated
herein to obtain certain administrative services for shareholders of Classes of
the Funds ("Shares").
2. This Plan is designed to compensate broker/dealers and other participating
financial institutions and other persons ("Administrators") for providing
administrative support services to the Portfolios and their shareholders. These
administrative support services may include, but are not limited to the
following: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory and computer personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Portfolios; assisting clients in changing dividend options, account designations
and addresses; and providing such other services as the Portfolios reasonably
request. The Plan will be administered by Mentor Distributors, Inc., the primary
distributor of the Trust's shares (the "Distributor").
3. Any payment to the Distributor in accordance with this Plan will be made
pursuant to the Distribution Agreement entered into by the Trust and the
Distributor. Such payments shall be limited to the reimbursement of payments
made by the Distributor to the Administrators. The fees paid under this Plan are
intended to qualify as "service fees" as defined in Section 26 of the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (or any
successor provision) as in effect from time to time.
4. The Distributor has the right (i) to select, in its sole discretion, the
Administrators to participate in the Plan and (ii) to terminate without cause
and in its sole discretion any agreement with any Administrator.
5. Quarterly in each year that this Plan remains in effect, the Distributor
shall prepare and furnish to the Board of Trustees of the Trust, and the Board
of Trustees shall review, a written report of the amounts expended under the
Plan and the purpose for which such expenditures were made.
6. This Plan shall become effective with respect to any Class (i) after approval
by a majority of the votes of: (a) the Trust's Board of Trustees; and (b) the
Disinterested Trustees of the Trust; and (ii) upon execution of an exhibit
adopting this Plan with respect to such Class.
-105-
<PAGE>
7. This Plan shall remain in effect with respect to each Class set forth on an
exhibit and any subsequent Classes added pursuant to an exhibit.
8. All material amendments to this Plan must be approved by a vote of the Board
of Trustees of the Trust and of the Disinterested Trustees.
9. This Plan may be terminated with respect to a particular Class at any time
by: (a) a majority vote of the Disinterested Trustees; or (b) a vote of a
majority of the outstanding voting securities of the particular Class as defined
in Section 2(a)(42) of the Act; or (c) by the Distributor on 60 days notice to
the Trust.
10. While this Plan shall be in effect, the selection and nomination of
Disinterested Trustees of the Trust shall be committed to the discretion of the
Disinterested Trustees then in office.
11. All agreements with any person relating to the implementation of this Plan
shall be in writing and any agreement related to this Plan shall be subject to
termination, without penalty, pursuant to the provisions of Paragraph 9 herein.
12. This Plan shall be construed in accordance with and governed by the laws of
the Commonwealth of Virginia.
-106-
<PAGE>
EXHIBIT A
to the
Shareholder Services Plan
MENTOR INSTITUTIONAL TRUST
Mentor Perpetual International Portfolio - Class A, Class B, and Class E
This Plan is adopted by Mentor Institutional Trust with respect to the
Classes of Shares of the portfolios of the Trust set forth above.
In compensation for the services provided pursuant to this Plan,
Administrators will be paid a monthly fee computed at the annual rate not to
exceed 0.25 of 1% of the average aggregate net asset value of the shares of all
participating classes held during the month.
Witness the due execution hereof this day of August, 1996.
MENTOR INSTITUTIONAL TRUST
By:______________________________
President
-107-
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANT
The Trustees and Shareholders
Mentor Institutional Trust
We consent to the use of our report dated December 8, 1995 incorporated by
reference herein and to the reference to our firm under the caption "FINANCIAL
HIGHLIGHTS" in the prospectuses incorporated by reference herein for the Mentor
Cash Management Portfolio, Mentor Intermediate Duration Portfolio and Mentor
Fixed-Income Portfolio, and "INDEPENDENT ACCOUNTANTS" in the statements of
additional information for the Mentor Cash Management Portfolio, Mentor
Intermediate Duration Portfolio, Mentor Fixed- Income Portfolio and included
herein for the Mentor Perpetual International Portfolio.
KPMG Peat Marwick LLP
Boston Massachusetts
July 1, 1996
-108-
<PAGE>
Exhibit 15
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
OF
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
This PLAN OF DISTRIBUTION approved this day of August, 1996, by Mentor
Institutional Trust (the "Trust") on behalf of the Mentor Perpetual
International Portfolio, a series of shares of beneficial interest of the Trust
(the "Portfolio").
RECITALS
A. The Trust intends to engage in business as an open-end, diversified
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "Act"); and
B. The Portfolio desires to adopt a Plan of Distribution pursuant to
Rule 12b-1 under the 1940 Act in respect of its Class B shares, and the Trustees
of the Trust have determined that there is a reasonable likelihood that adoption
of this Plan of Distribution will benefit the Portfolio and its shareholders;
and
C. The Portfolio intends to employ Mentor Distributors, Inc. (the
"Distributor") as distributor and underwriter of the securities of which it is
the issuer;
NOW, THEREFORE, the Trust, on behalf of the Portfolio, hereby adopts this
Plan of Distribution (the "Plan") in respect of the Portfolio's Class B shares,
in accordance with Rule 12b-1 under the 1940 Act on the following terms and
conditions:
1. The Portfolio shall pay to the Distributor a distribution fee for expense
related to distribution of its Class B shares at the annual rate of 0.75 of one
percent (0.75%) of the Portfolio's average daily net assets attributable to its
Class B shares, such fee to be calculated
-109-
<PAGE>
and accrued daily and paid monthly. In addition, the Distributor will receive a
contingent deferred sales charge, as described in the Trust's prospectus, upon
Class B shares of the Portfolio redeemed by a shareholder who has held such
shares for a period of five years or less. The contingent deferred sales charge
will not offset amounts to be paid to the Distributor under the Plan of
Distribution.
2. The amount set forth in paragraph 1 of this Plan shall be paid for the
Distributor's services as distributor of the Class B shares of the Portfolio in
accordance with the Distribution Agreement between the Distributor and the Trust
and may be spent by the Distributor or its agents on any activities or expenses
related to the sale and repurchase of the Portfolio's Class B shares, including,
but not limited to, commissions and other compensation to persons who engage in
or support distribution and repurchase of shares; printing of prospectuses and
reports for other than existing shareholders; advertising; preparation and
distribution of sales literature; and overhead, travel and telephone expenses.
3. This Plan shall not take effect until it has been approved by a vote of
Class B shares constituting at least a majority of the outstanding voting
securities, as defined in the 1940 Act, of such class.
4. This Plan shall not take effect until it has been approved, together with
any related agreements, by votes of a majority of both (a) the Trustees and (b)
those Trustees who are not "interested persons" of the Trust (as defined in the
1940 Act) and have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the "Rule 12b-1 Trustees"), cast in
person at a meeting or meetings called for the purpose of voting on this Plan
and such related agreements.
-110-
<PAGE>
5. This Plan shall continue in effect for successive periods of one year
from its execution for so long as such continuance is specifically approved at
least annually in the manner provided for approval of this Plan in paragraph 4.
6. Any person authorized to direct the disposition of monies paid or payable
by the Portfolio pursuant to this Plan or any related agreement shall provide to
the Trustees and the Trustees shall review, at least quarterly, a written report
of the amounts so expended and the purposes for which such expenditures were
made.
7. This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees or by vote of Class B shares constituting a majority of the
outstanding voting securities of such class.
8. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in paragraph 1 hereof unless such amendment
is approved in the manner provided for initial approval in paragraph 3 hereof,
and no material amendment to the Plan shall be made unless such amendment is
approved in the manner provided for initial approval in paragraph 4 hereof.
9. While this Plan is in effect, the selection and nomination of Trustees
who are not interested persons (as defined in the 1940 Act) of the Trust shall
be committed to the discretion of the Trustees who are themselves not interested
persons.
10. The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to paragraph 6 hereof for a period of not less
than six years from the date of execution this Plan, or of the agreements or of
such reports, as the case may be, the first two years in an easily accessible
place.
-111-
<PAGE>
A copy of the Agreement and Declaration of Trust of the Trust is on file
with the Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees, officers, or shareholders
of the Trust but are binding only upon the assets and property of the Trust.
IN WITNESS WHEREOF, the Trust has executed this Plan of Distribution as of
the date first above written.
MENTOR INSTITUTIONAL TRUST
on behalf of the Mentor Perpetual
International Portfolio
Date: , 1996 By: __________________________
President
-112-
Exhibit 18
MENTOR INSTITUTIONAL TRUST
PLAN PURSUANT TO RULE 18F-3(D) UNDER THE
INVESTMENT COMPANY ACT OF 1940
Effective August __, 1996
Each series of shares of beneficial interest in Mentor Institutional Trust
(the "Trust") (each a "Portfolio" and, together, the "Portfolios") may from time
to time issue one or more of the following classes of shares: Class A shares,
Class B shares, Class D shares and Class E shares. Each class is subject to such
investment minimums and other conditions of eligibility as are set forth in the
prospectus in respect of any such Portfolio as from time to time in effect
(each, the "Prospectus"). The differences in expenses among these classes of
shares, and the conversion and exchange features of each class of shares, are
set forth below in this Plan. Except as noted below, expenses are allocated
among the classes of shares of each Portfolio based upon the net assets of each
Portfolio attributable to shares of each class. This Plan is subject to change,
to the extent permitted by law and by the Agreement and Declaration of Trust and
By-laws of the Trust, by action of the Trustees of the Trust.
CLASS A SHARES
DISTRIBUTION AND SERVICE FEES
Class A shares pay no Rule 12b-1 distribution fees, but pay shareholder
service fees of .25% of the relevant Portfolio's average net assets attributable
to Class A shares.
EXCHANGE FEATURES
Class A shares of any Portfolio may be exchanged, at the holder's option,
(i) for Class A shares of any other Portfolio and any portfolio of The Mentor
Funds which offers Class A shares and (ii) for shares of the Cash Resource U.S.
Government Money Market Fund, without the payment of a sales charge beginning 15
days after purchase, provided that such other shares are available to residents
of the relevant state. The holding period for determining any CDSC will include
the holding period of the shares exchanged, and will be calculated using the
schedule of any portfolio into or from which shares have been exchanged that
would result in the highest CDSC applicable to such shares.
CONVERSION FEATURES
Class A shares do not convert into any other class of shares.
INITIAL SALES CHARGE
Class A shares are offered at a public offering price that is equal to their
net asset value ("NAV") plus a sales charge of up to 5.75% of the public
offering price (which maximum may be less for
-113-
<PAGE>
certain Portfolios, as described in the Prospectus). The sales charges on Class
A shares are subject to reduction or waiver as permitted by Rule 22d-1 under the
1940 Act and as described in the Prospectus.
CONTINGENT DEFERRED SALES CHARGE
Purchases of Class A shares of $______ or more that are redeemed within one
year of purchase are subject to a CDSC of 1.00% of either the purchase price or
the NAV of the shares redeemed, whichever is less. Class A shares are not
otherwise subject to a CDSC.
The CDSC on Class A shares is subject to reduction or waiver in certain
circumstances, as permitted by Rule 6c-10 under the 1940 Act and as described in
the Prospectus.
CLASS B SHARES
DISTRIBUTION AND SERVICE FEES
Class B shares pay distribution fees pursuant to plans adopted pursuant to
Rule 12b-1 under the 1940 Act (the "Class B Plans"). Class B shares also bear
any costs associated with obtaining shareholder approval of the Class B Plans
(or an amendment to a Class B Plan). Pursuant to the Class B Plans, Class B
shares may pay up to .75% of the relevant Portfolio's average net assets
attributable to Class B shares (which percentage may be less for certain
Portfolios, as described in the Prospectus). Amounts payable under the Class B
Plans are subject to such further limitations as the Trustees may from time to
time determine and as set forth in the Prospectus.
EXCHANGE FEATURES
Class B shares of any Portfolio may be exchanged, at the holder's option,
(i) for Class B shares of any other Portfolio and any portfolio of the Mentor
Funds which offers Class B shares and (ii) for shares of the Cash Resource U.S.
Government Money Market Fund, without the payment of a sales charge beginning 15
days after purchase, provided that such other shares are available to residents
of the relevant state. The holding period for determining any CDSC will include
the holding period of the shares exchanged, and will be calculated using the
schedule of any Portfolio into or from which shares have been exchanged that
would result in the highest CDSC applicable to such Class B shares.
CONVERSION FEATURES
Class B shares do not convert into any other class of shares.
INITIAL SALES CHARGE
Class B shares are offered at their NAV, without an initial sales charge.
-114-
<PAGE>
CONTINGENT DEFERRED SALES CHARGE
Class B shares that are redeemed within 6 years of purchase are subject to a
CDSC of up to 4.00% of either the purchase price or the NAV of the shares
redeemed, whichever is less (which period may be shorter and which percentage
may be less for certain Portfolios, as described in the Prospectus); such
percentage declines the longer the shares are held, as described in the
Prospectus. Class B shares purchased with reinvested dividends or capital gains
are not subject to a CDSC.
The CDSC on Class B shares is subject to reduction or waiver in certain
circumstances, as permitted by Rule 6c-10 under the 1940 Act and as described in
the Prospectus.
CLASS D SHARES
DISTRIBUTION AND SERVICE FEES
Class D shares pay no Rule 12b-1 distribution fees.
EXCHANGE FEATURES
Class D shares of any Portfolio may be exchanged, at the holder's option,
(i) for Class D shares of any other Portfolio and (ii) for shares of the Cash
Resource U.S. Government Money Market Fund, without the payment of a sales
charge beginning 15 days after purchase, provided that such other shares are
available to residents of the relevant state.
CONVERSION FEATURES
Class D shares do not convert into any other class of shares.
INITIAL SALES CHARGE
Class D shares are offered at their NAV, without an initial sales charge.
-115-
<PAGE>
CONTINGENT DEFERRED SALES CHARGE
Class D shares are not subject to any CDSC.
CLASS E SHARES
DISTRIBUTION AND SERVICE FEES
Class E shares pay no Rule 12b-1 distribution fees, but pay shareholder
service fees of .25% of the relevant Portfolio's average net assets attributable
to Class E shares.
EXCHANGE FEATURES
Class E shares of any Portfolio may be exchanged, at the holder's option,
(i) for Class E shares of any other Portfolio and (ii) for shares of the Cash
Resource U.S. Government Money Market Fund, without the payment of a sales
charge beginning 15 days after purchase, provided that such other shares are
available to residents of the relevant state.
CONVERSION FEATURES
Class E shares do not convert into any other class of shares.
INITIAL SALES CHARGE
Class E shares are offered at their NAV, without an initial sales charge.
CONTINGENT DEFERRED SALES CHARGE
Class E shares are not subject to any CDSC.
-116-
